Fed’s Waller: Don’t blame rising rates for recent bank closures

The Federal Open Market Committee’s decision to rapidly increase the federal funds rate over the past year was not a major factor in the recent bank failures, Federal Reserve Governor Christopher Waller said today. Speaking at an economic conference in Norway, Waller said it is not clear that strains caused by the failures intensified recent tightening of lending conditions. “While lending conditions imposed by banks have tightened since March, the changes so far are in line with what banks have been doing since the Fed began raising interest rates more than a year ago,” he said.

Waller further disputed the argument that FOMC’s tightening of monetary policy played a major part in the bank failures and stress in the banking system. “[Critics] argue we should have taken this into account when setting policy,” he said. “Let me state unequivocally: The Fed’s job is to use monetary policy to achieve its dual mandate, and right now that means raising rates to fight inflation. It is the job of bank leaders to deal with interest rate risk, and nearly all bank leaders have done exactly that.

“I do not support altering the stance of monetary policy over worries of ineffectual management at a few banks,” Waller added. “We will continue to pursue our monetary policy goals, which ultimately support a healthy financial system. At the same time, we will continue to use our financial stability tools to prevent the buildup of risks in the financial system and, when needed, to address strains that may emerge.”