Federal Reserve officials need to be cautious about aggressively raising the federal funds rate given potential “financial headwinds”—such as tighter credit conditions—following the closures of Silicon Valley Bank and Signature Bank, Chicago Fed President Austan Goolsbee said today. The Federal Open Market Committee raised the rate by 25 basis points during its meeting in March, which came not long after the bank failures. In remarks to the Economic Club of Chicago, Goolsbee said that moments of financial stress can mean tighter credit conditions, and there are signs banks were beginning to pull back on lending even before the closures. “These can have a material impact on the real economy in a way that the Fed absolutely needs to take into account when setting policy,” he said.
“If they develop, the Fed would need to account for these potential headwinds when setting monetary policy,” Goolsbee said. “In some ways, it’s almost mechanical; we’ve been tightening financial conditions to bring inflation down, so if the response to recent banking problems leads to financial tightening, monetary policy has to do less.”
Given that uncertainty, “I think we need to be cautious,” Goolsbee said. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”