Crisis lessons for U.S. Federal Reserve as Powell waits to find out why banks collapsed
CBC
Crisis is a great teacher — for central bankers and for the rest of us.
Canadians who thought money was an unchanging unit for earning, saving and spending learned their lesson from a year of inflation.
And anyone who thought banks were glorified instant teller machines certainly learned something over the last two weeks as they watched contagion from the disintegrating Silicon Valley Bank (SVB) help bring down Swiss banking giant Credit Suisse.
Just over a year ago, the world's most powerful central banker, U.S. Federal Reserve chair Jerome Powell, admitted that inflation caught him by surprise. On Wednesday, Powell said he still had a lot to understand about why and how those banks collapsed and the effect on inflation and the economy.
"We are committed to learning the lessons from this episode and how to prevent events like this from happening again," Powell told reporters at the central bank's monetary policy news conference.
And there is plenty more to learn about the impact of those events and when the disruption will be over. The Fed chair said that as banks restrain their own lending to try to prevent themselves from getting into trouble, ordinary people are going to feel the effects — including making it harder for them to get loans and a slowing down of economic growth.
"Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes," Powell said. "It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond."
One monetary policy response was for the central bank to pare its rate hike to a quarter-point instead of the half-point increase expected early this month.
Only days before SVB crumbled, Powell had testified to Congress that the Fed would likely have to raise rates higher and faster to fight rising prices — clear evidence he did not see the banking turmoil and its disruptive effects coming.
The change takes U.S. central bank rates into the 4.75 to five per cent range. That compares with the Bank of Canada's Canadian policy rate target of 4.5 per cent. However, Canadians trying to obtain or renew a five-year mortgage may still be affected because longer-term Canadian borrowing is strongly influenced by U.S. bond rates.
For Canadian and U.S. long-term borrowers, a quarter-point increase is better than a half. But the implication of those "tighter credit conditions" means banks may be fussier about whom they lend to.
While Powell echoed Treasury Secretary Janet Yellen's recent comments that U.S. banks were "safe and sound" and that depositors would not lose their savings, the Fed still remains unsure about how long distress in the banking sector will last. He said there was a lack of precision about how negative an impact it will have on the economy.
In fact, in their discussions just prior to Wednesday's policy announcement, Powell said he and his panel of advisers had seriously considered following Canada's lead and pausing interest rate hikes altogether.
Economists from at least one financial group, Japan's Nomura, had suggested the Fed would actually cut rates by half a per cent.
