Central bank officials are doubling down on the rate hike decision, citing high inflation

Federal Reserve officials on Friday defended their decision to advance their monetary tightening campaign this week, citing persistent concerns about rising inflation despite continued pressure across the U.S. banking sector.

The central bank raised rates by a quarter-point for the second straight time on Wednesday, lifting the federal funds rate to a new target range of 4.75 percent to 5 percent, as midsize lenders struggled to cope with the fallout from the implosion. Silicon Valley Bank.

“There was a lot of discussion. . . But at the end of the day, what we concluded was that there are clear signs that the banking system is resilient and resilient,” Atlanta Fed President Raphael Bostick said in an interview with NPR on Friday. “On the back of that, inflation is still high.”

St. Louis Fed President James Bullard reiterated Bostick’s comments on price pressures, arguing that inflation is “too high” and that the central bank is justified in continuing to squeeze the economy because it has the tools to stabilize the financial system. “Accommodating monetary policy can continue to exert downward pressure on inflation,” he said.

In comments Friday, Bullard downplayed the impact of the current banking crisis on the U.S. economy.

“Financial pressures may be distressing but will keep interest rates low,” he said in comments. “Lower rates will be a positive factor for the macro economy.”

He later told reporters that the odds of the current financial stress ending without further deterioration are 80 percent. That means the central bank is more likely to face a warming economy and higher inflation, which “will pick up somewhat as we go into 2023,” he said.

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Benchmark 10-year Treasury yields fell more than half a percentage point from SVB’s decline to 3.32 percent, while the two-year yield fell more than a percentage point to 3.63 percent. The two-year yield is particularly sensitive to interest rate expectations and has posted its biggest moves since 1987 in recent weeks.

Investors in the futures market on Friday fully priced in the possibility of an additional quarter-point increase in May. Traders are also betting that the Fed will be forced to cut interest rates this year — something the Fed doesn’t expect, Powell said.

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At a press conference following Wednesday’s rate decision, Fed Chairman Jay Powell acknowledged that officials had considered pausing their campaign for a rate hike in light of the recent banking turmoil, but said the eventual hike was “a very strong consensus.”

Tom Barkin, president of the Richmond Fed, told CNN on Friday that the case for raising rates this week is “pretty clear” because inflation is still “high” and demand “doesn’t look like it’s going down.”

But Powell also noted this week that there is still uncertainty about the extent to which the credit crunch will be caused by a slowdown in small and regional banks.

While the Fed’s policy statement noted that “some additional policy stabilization may be appropriate,” Powell emphasized the importance of the words “some” and “may” to reporters.

Bullard told reporters on Friday that he had raised his forecasts for how far the central bank would raise its benchmark rate this year by a quarter of a percentage point, reflecting strong growth in the first few months of the year. He now expects a “terminal” rate of 5.6 percent.

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That’s higher than the average estimate calculated by officials this week, with most forecasts putting the rate between 5 percent and 5.25 percent. That suggests another quarter-point rate hike, and is in line with December’s projections.

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