NEW YORK—Federal Reserve Bank of New York President John Williams said on Monday that financial system troubles that drove the central bank to provide large amounts of credit to banks is not collateral damage from the Fed’s aggressive effort to lower inflation.
“I personally don’t think the pace of rate increases was behind the issues at the two banks back in March,” Williams said at an event held at New York University.
The central banker, who is also vice-chairman of the rate-setting Federal Open Market Committee, was referring to the failures of Silicon Valley Bank and Signature Bank, which kicked off market fears over the state of the financial system.
Analysts say some of the issues faced by banks were due to not having properly prepared for an environment of rapidly rising rates, which has defined monetary policy over the last year as the Fed tried to bring down high levels of inflation.
The banking sector stress drove the Fed to provide substantial amounts of liquidity to the financial system, even as officials have stressed repeatedly that by and large the banking system is safe and sound and abounding with liquidity. Recent data shows a slow move down in Fed emergency lending, but the absolute level of lending still remains very high.
Williams said he viewed the trouble at the two banks as unique in nature and unlikely to reflect broader trends in the financial system.
That said, Fed officials have said that banking sector stress will likely weigh on the economy, as financial firms pull back on lending. That in turn could result in lower activity levels while also helping to further cool price pressures.
New York Fed data released earlier Monday said American households are facing greater headwinds in obtaining credit and foresee that challenge growing over time, even as they rate their personal financial conditions favorably.
Williams said that while past episodes of financial sector stress point to tightening credit, as it now stands, “we haven’t seen clear signs yet of credit conditions tightening and we don’t know how big this effect will be” if it happens.
In his speech, Williams also reiterated that he believes inflation, now at around 5 percent, will come down slowly over time and will ease to 3.75 percent this year and will likely ebb to the 2 percent target by 2025. Williams said that he also sees a gradual rise over time in unemployment from the current low 3.5 percent to between 4 percent and 4.5 percent.
Williams said he is not concerned by market expectations of rate cuts even though the Fed currently has penciled in an additional rate rise this year. Instead, he said he was cheered by what he sees as market participants reacting to incoming data.
“I don’t really worry about” the divergence, Williams said. ”I think part of it is because there is an expectation among many market participants and economists that the economy’s going to slow even more than I expect.”
