Live news: Fed governor Bowman says bank failures not an indictment of regulatory landscape

Federal Reserve governor Christopher Waller has voiced his support for another rate rise this May, despite the recent banking stress. Waller stated that the failure of several US lenders has not had a significant impact on credit creation and that there is still work to be done to bring inflation under control. Although there is uncertainty surrounding the fallout of banking stress, the labour market remains strong and tight, and inflation is far above target; thus, monetary policy needs to be tightened further. However, it remains to be seen how much further the tightening will go and is dependent on data from inflation and the real economy, as well as the degree of tightening credit conditions.

Waller’s statement comes as the US economy continues to rebound from the Covid-19 pandemic. Since the Federal Reserve initially cut interest rates to deal with the initial fallout, the US economy has shown signs of strength. Despite this, Waller and his colleagues at the Federal Reserve have considered the possibility of rate rises. They believe that the US economy has recovered enough that the central bank can start reducing its support; they also recognise that inflation is more robust than previously predicted, thereby prompting a need for more immediate action. A rate hike, however, can trigger concerns about increased debt servicing and equity market weakness, despite the likelihood of an overall positive outcome.

Overall, it is essential to monitor incoming data on inflation, the real economy and tightening credit conditions to determine the extent of further tightening. Regardless of how much further the Fed decides to tighten monetary policy, it is essential to recognize that it is a balancing act. While Waller and his colleagues believe in the need for tightening, the Fed must be careful to ensure that they do not raise rates too quickly, thereby leading to harmful side effects such as inflation, higher debt servicing costs and decreased investment.



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