ECONOMYNEXT – The US Federal Reserve hiked rates 25 percent to 5.25 percent amid continued banking jitters after several years of money printing and Chairman Jerome Powell said its future actions will be data driven.
“Looking ahead, we will take a data-dependent approach in determining the extent to which additional policy firming may be appropriate,” Powell told reporters.
The Fed will continue to withdraw 95 billion dollars a month in excess liquidity from the banking system by selling down 60 billion in Treasuries and 35 billion in mortgage securities.
If required liquidity up to 500 billion will be injected overnight at 5.25 percent.
Under Powell the concept of ‘excess reserves’ was removed and excess liquidity is now called ‘reserve balances’. The Fed will pay banks 5.15 percent for reserve balance.
After more than a decade of excess liquidity and sharply lower interest rates during the Covid pandemic which had fired the current inflation bout, US banks were hit by mark to market losses from bonds bought during pandemic rate lows.
“Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient,” Powell said.
“We will continue to monitor conditions in this sector. We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.”
The ‘right lessons’ referred to supervisory gaps identified in respect to Silicon Valley Bank.
After then Fed Vice Chair Ben Bernanke persuaded Alan Greenspan to cut rates for eight years ending the Great Moderation on what is called a ‘false deflation scare’ eventually triggering the housing bubble greater emphasis has been placed on regulation including.
Attempts have been made to bring in greater ‘macro-prudential regulation’, instead of operating a sound monetary system which focusses on stability, according to critics.
The full Fed Open Market Operations statement is reproduced below:
Federal Reserve issues FOMC statement
Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.