(Reuters) – San Francisco Federal Reserve Bank President Mary Daly on Wednesday said that while U.S. economic strength, labor market tightness, and too high-inflation suggest there is “more work to do” on Fed rate hikes, other factors including tighter credit conditions could argue for a pause.
“Looking ahead, there are good reasons to think that policy may have to tighten more to bring inflation down,” she said in remarks prepared for delivery to the Salt Lake Chamber in Salt Lake City, Utah. “But there are also good reasons to think that the economy may continue to slow, even without additional policy adjustments.”
It’s the first time Daly has spoken since the failure of two banks last month rattled confidence in the banking sector and raised the specter of sharply tighter credit conditions that could slow the economy quickly.
Despite that risk, the Fed raised its benchmark lending rate by a quarter-of-a-percent to a 4.75%-5.00% range, citing the risks from continued too-high inflation that by the Fed’s preferred measure is running at more that twice the Fed’s 2% goal.
The Fed is widely expected to raise rates again when it next meets, on May 2-3, capping a rate-hike campaign that began in March 2022 when rates were near zero.
“While the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do,” Daly said. “How much more depends on several factors, all with considerable uncertainty attached to their evolution.”
BANKING STRESS
One of the two banks that failed last month, Silicon Valley Bank, did so after examiners at Daly’s regional Fed bank had repeatedly raised red flags over liquidity risk and bank management in confidential citations to its board of directors and executives.
The Fed Board in Washington oversees supervision of large regional banks like SVB, and Fed Vice Chair Michael Barr is undertaking a review of what went wrong to be published on May q.
Daly said the banking system is sound and resilient, and the Fed’s actions demonstrate that “we are committed to ensureing that all deposits are safe.”
“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound,” she said.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)
