Fed officials are compounding the decision to raise interest rates due to rising inflation

Federal Reserve officials on Friday defended their decision to press ahead with their monetary tightening campaign this week despite ongoing stress across the US banking sector, citing persistent concerns about rising inflation.

On Wednesday, the central bank raised interest rates by a quarter point for the second time in a row, raising the federal funds rate to a new target range of 4.75 percent to 5 percent, even as medium-sized lenders struggled to cope with the fallout from an implosion. Silicon Valley Bank.

There was a lot of controversy. . . “But at the end of the day, we’ve decided there are clear signs that the banking system is healthy and resilient,” said Rafael Bostick, president of the Atlanta Federal Reserve, in an interview with NPR on Friday. “However, as a background, inflation is still very high.”

James Bullard, President of the Federal Reserve Bank of St. Louis, echoed Bostick’s comments about price pressures, saying that inflation remains “very high” and arguing that the central bank was right to continue squeezing the economy because it has the tools to stabilize the financial system. “Adequate monetary policy can maintain downward pressure on inflation,” he said.

In remarks on Friday, Bullard downplayed the impact of the current banking turmoil on the US economy, noting that it is unlikely to lead to a material shock.

“Fiscal pressures can be horrendous, but they also tend to lower the level of interest rates,” he said in remarks. “Low rates, in turn, tend to be a bullish factor for the overall economy.”

He later told reporters he put the odds of the current bout of financial stress ending without further deterioration at 80 per cent. That means the Fed is likely to face a hotter economy and higher inflation, prompting it to “raise somewhat higher over the time to 2023,” he said.

Benchmark 10-year Treasury yields have fallen more than half a percentage point to 3.32 percent since the SVB crash, while the two-year yield has fallen more than a percentage point to 3.63 percent. The two-year yield in particular is sensitive to interest rate expectations, and has posted its biggest move since 1987 in recent weeks.

Investors in the futures market on Friday priced in the possibility of an additional quarter-point increase in May. Traders are also betting that the Fed will have to cut interest rates this year – something Powell said the Fed does not expect to do.

At the press conference following Wednesday’s rate decision, Federal Reserve Chairman Jay Powell acknowledged that officials had considered pausing their campaign to hike rates in light of the recent banking turmoil, but said the hike in the end was “supported by a very strong consensus.”

Richmond Fed President Tom Barkin told CNN on Friday that the case for a rate hike this week was “very clear” given that inflation remains “high” and demand “doesn’t appear to be down.”

But Powell also noted this week that there remains uncertainty about the extent to which the credit crunch could stem from reduced activity in small and regional banks, comments that suggested the Fed may be nearing the end of its tightening campaign.

And while the Fed’s policy statement noted that “some additional policies may be appropriate,” Powell emphasized to reporters the importance of the words “some” and “may.”

Bullard told reporters on Friday that he raised his forecast for how far the Fed will raise its benchmark rate this year by a quarter of a percentage point, reflecting stronger growth in the first few months of the year. He now expects a so-called “final” rate of 5.6 per cent.

That’s higher than the median estimate officials gave this week, with most expecting the rate to peak between 5 percent and 5.25 percent. It proposes only one quarter-point rate hike, and is in line with the December forecast.