Jerome Powell, Chairman of the Federal Reserve Board, speaks during a press conference at the Federal Reserve in Washington, DC, March 22, 2023.
Olivier Douliery | AFP | Getty Images
Federal Reserve Chair Jerome Powell said on Wednesday that the US banking sector is strong but that the recent collapse of some regional banks could cause ripple effects that slow the economy.
At a news conference after the Federal Open Markets Committee’s last meeting, Powell described the banking system as “solid and resilient,” but said the central bank was watching a change in the availability of credit for consumers and businesses.
“Financial conditions appear to have tightened, and probably more than traditional indices are saying. … The question for us, however, is how significant that will be — how big will it be and how long will it last,” Powell said.
“We’ll see how serious this is and if it looks like it’s going to last. And if it does, it could easily have a significant macroeconomic impact and we would factor that into our policy decisions,” he added.
The Fed raised interest rates by a quarter of a point on Wednesday, but its forecast called for only one more hike for the remainder of the year. The central bank governor said tighter financial conditions, caused by banks’ tighter lending decisions, could have an impact similar to further rate hikes by the Fed.
Powell’s comments come after regional banks came under significant pressure this month. The Silicon Valley Bank collapsed, becoming the second largest bankruptcy in US history, in part because the rapid rise in interest rates devalued its bond portfolio and caused large paper losses for the bank.
SVB’s management has “failed badly” in managing its interest rate risk, while other banks have been able to cope with the rate hikes, Powell said.
Other banks, including First Republic and PacWest, saw significant deposit outflows. The Fed launched a new Bank Term Funding Program to help banks access cash, but regional bank shares have fallen into volatile trading since the facility was launched on March 12.
Powell said deposit flows had stabilized over the past week and that Americans should be confident their money is safe, though he didn’t specifically say all deposits are now guaranteed.
“What I’m saying is that you’ve seen that we have the tools in place to protect depositors when there is a threat of serious damage to the economy or the financial system, and we stand ready to use those tools. I think depositors should assume that their deposits are safe,” he said.
The collapse of the Silicon Valley bank has prompted closer scrutiny of the Federal Reserve’s oversight role over banks, particularly from Senator Elizabeth Warren (D-MA).
The Fed is conducting an internal review of potential regulatory issues surrounding the SVB, led by vice chairman Michael Barr, and Powell said he awaits investigations from outside the central bank as well.
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