WASHINGTON — Federal Reserve Chair Jerome Powell brushed away concerns of financial stability as he announced another large interest rate hike Wednesday afternoon.
During this week's Federal Open Market Committee meeting, the Fed voted unanimously to raise its benchmark interest rate by three-quarters of a percentage point, the fourth such increase in as many meetings. The Fed's target interest rate range is now 3.75-4%, the highest rate since January 2008.
While broadly expected, this latest 75-basis-point hike comes against a backdrop of
"It's premature to discuss pausing and it's not something that we're thinking about. That's really not a conversation to be had. We have a ways to go," Powell said during a press conference following the meeting on Wednesday. "And one thing I'll say is that I would want people to understand our commitment to getting this done, and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon."
Yet many are more worried about the Fed going too far than not far enough. In the weeks since the Fed's last meeting in September, a growing number of economists, policy experts and lawmakers — primarily Democrats — have raised concerns that the Fed is jeopardizing the U.S. labor market as well as global financial markets through its aggressive policy changes.
Pointing to
Powell described the decline in mortgage activity and home prices seen in recent months as a necessary correction to an overheated market. He also noted that the current hardships in real estate markets were unlikely to bleed over into other parts of the economy.
"From a financial stability standpoint, we didn't see, in this cycle, the kinds of poor credit underwriting that we saw before the global financial crisis," Powell said. "Housing credit was … much more carefully managed by the lenders, so it's a very different situation and … doesn't appear to present stability issues, but we do understand that that's a very big effect of our policy."
Lawmakers also urged the Fed to
Powell addressed the topic of the Fed's dual mandate repeatedly during both his prepared remarks and in response to questions posed during the press conference. He said the Fed remained committed to maintaining maximum employment, adding that stabilizing prices would be key to that.
"Restoring price stability is essential to set the stage for achieving maximum employment and stable prices in the longer run," he said, adding that given that job openings are currently outnumber job seekers, a correction in the labor market could take place with fewer job losses that is broadly expected.
Powell said the Fed remained committed to increasing interest rates until prices stabilize and noted that further increases will likely be necessary to achieve that goal. But, the statement released by the FOMC acknowledges there are many factors that could cause it to change course.
"The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee's goals," the statement reads. "The committee's assessment will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
Questions have also been raised about how monetary adjustments in the U.S. might impact global financial stability. In
Brainard noted that the ripple effects of higher Fed interest rates would be felt most acutely in emerging economies. Distress in those markets, she added, could have a destabilizing effect on the global economy.
"For instance, in countries where sovereign or corporate debt levels are high, higher interest rates could increase debt-servicing burdens and concerns about debt sustainability, which could be exacerbated by currency depreciation," she said. "An increase in risk premiums could kick off deleveraging dynamics as financial intermediaries de-risk. And shallow liquidity in some markets could become an amplification channel in the event of further adverse shocks."
Powell said the Fed monitors global economic conditions as well as geopolitical developments and factors them into its monetary policy decisions to craft policies that minimize the risk of spillover effects that could threaten the U.S. economy.
Powell said he believed the Fed's actions had little impact on rising inflation in Europe, noting that it has largely been driven by rising energy prices, on which the Fed has little impact. He said the best thing the U.S. can do to protect global financial stability is stabilize prices domestically.
"Price stability in the United States is a good thing for the global economy over a long period of time," he said. "Price stability is the kind of thing that pays dividends for our economy for decades, hopefully. Even though it may be difficult to get it back. Getting it back is something that provides value to the people we serve for the long run."
