Washington, United States–The US Federal Reserve should exercise caution when setting interest-rate policy in the wake of the collapse of Silicon Valley Bank (SVB), a top Fed official said Tuesday.
“I think we need to be cautious,” Chicago Fed president Austan Goolsbee told a conference in Chicago.
“We should gather further data and we should be extra careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting inflation down,” he said.
Goolsbee is a voting member of the Fed’s interest-rate-setting committee, which has been rapidly hiking its benchmark lending rate since last year as it battles with decades-high inflation fueled by the recovery from Covid-19 and the Russian invasion of Ukraine.
“At moments of financial stress like this the right monetary policy is really caution and watchfulness and prudence,” he said.
The Fed has raised interest rates by almost five percentage points since March of last year, tightening monetary policy in a bid to dampen demand and slow price increases.
It continued with another 25 basis-point hike last month despite the turbulence in the financial markets caused by the rapid collapse of SVB, which had taken on excessive interest-rate risk.
This set off a chain reaction in financial markets on both sides of the Atlantic, which caused the collapse of another regional American bank and the merger under pressure of Swiss investment banking giant Credit Suisse with regional rival UBS.
Fed chair Jerome Powell suggested after last month’s decision that there could be additional increases in the future if inflation remains elevated, despite the worries about the banking sector.
A majority of futures traders expect the Fed will hike rates by a further 25 basis points at its next meeting in may, according to data from CME Group.
“At the end of the day, the best central bankers are data dependent and the Fed’s job is to be more paranoid than anyone else,” Goolsbee said Tuesday. “That’s what they pay us for.”