In an article published earlier this month, Wall Street Journal columnist James Mackintosh wrote that the notion that higher rates were good for banks per se was a misconception. While the three collapsed banks had their individual problems, their failure was rooted in the sharp rise in interest rates and represented the initial expression of deep problems in the banking and financial system as a whole. Their demise constituted the second, third and fourth largest bank failures in US financial history-hardly an expression of a system that is “sound and resilient.” Direct government intervention was carried out on the grounds that it was required to avert considerable risk of “systemic” crisis. He was referring to the $23 billion bailout operation following the collapse of three significant banks in March and April-Silicon Valley Bank (SVB), Signature Bank and First Republic Bank. Powell again insisted that the “US banking system is sound and resilient,” and the Fed, together with the Treasury and the Federal Deposit Insurance Corporation (FDIC), had taken “decisive action in March to protect the US economy and to strengthen public confidence in our banking system.” The key concern of the Fed regarding interest rates is not the effect on jobs, but their impact on banks, particularly, at this stage, mid-sized banks.īut there are dangers for the financial system more broadly, which had gorged itself on the essentially free money provided when the Fed set interest rates at record lows and bought up trillions of dollars of government debt under its quantitative easing program. Powell has, on numerous occasions, expressed his admiration for former Fed Chair Paul Volcker, whose high interest rate regime in the early 1980s produced the highest unemployment rates since the 1930s. In fact, that is its goal-to increase the labour supply. They are trying to balance the risk that the economy proves more resilient than expected and inflation stays too high, requiring them to increase rates higher than otherwise.”ĭespite its so-called “dual mandate,” under which the Fed is charged with providing price stability and maximum employment, the Fed will not be deflected by rising jobless numbers. Reporting on Powell’s remarks, the Wall Street Journal said: “Fed officials see a risk that their past rate increases, together with recent banking industry stresses, will eventually create a sharper-than-anticipated slowdown. “Given how far we’ve come, it may make some sense to move rates higher, but to do so at a more moderate pace,” he told the House Financial Services Committee. The first may be carried out at its meeting next month. While the Fed decided at its policy-making meeting earlier this month to “pause” its rate rises-Powell said there was no need to increase rates as rapidly as in the past-it indicated that it expects at least two more rate rises this year. The Fed aims to close the gap by increasing the unemployment rate. “While the jobs-to-workers gap has narrowed, labour demand still substantially exceeds the supply of available workers,” he explained. Nominal wage growth had shown “some signs of easing” and job vacancies had declined somewhat, he said. He noted that the labour market remained “very tight” despite evidence of a slowing in US economic growth. In his opening remarks, Powell repeated the essential theme of all his comments and statements-that the demand for labour must be brought down by slowing the economy, possibly inducing a recession and thereby increasing the supply of labour. The chief target of the Fed’s interest rate hikes is the wage demands of the working class in the midst of what is, despite some reduction in recent months, the highest rate of inflation in four decades. Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing, Thursday, June 22, 2023, on Capitol Hill in Washington.
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