MNI: Fed's Cook Watching For Credit Hit To Economy, Inflation

Federal Reserve Governor Lisa Cook said Friday she's closely monitoring financial conditions to judge how much a pullback in lending after the collapse of two U.S. banks could slow the economy and aid the Fed's efforts to bring inflation back to 2% without significantly higher interest rates.

The FOMC this month signaled rates would peak at 5%-5.25% and softened its guidance to say “some additional policy firming may be appropriate,” as it sought to calibrate monetary policy to be sufficiently restrictive amid economic uncertainty.

"The incoming data would suggest a somewhat higher inflation rate for this year and stronger economic growth. However, I am closely watching developments in the banking sector, which have the potential to tighten credit conditions and counteract some of that momentum," she said in remarks prepared for the Midwest Economics Association.

"If tighter financing conditions restrain the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence. On the other hand, if data show continued strength in the economy and slower disinflation, we may have more work to do," she said.

CREDIT RESTRAINT

The inflation picture is "less favorable than it appeared earlier this year" and showing stickiness, Cook said. Reining in price rises in non-housing core services categories like travel, dining out and medical care in particular will likely require some combination of slowing demand and further recovery in supply.

Meanwhile, there are some signs that the labor market is softening at the margin, she said. Job gains slowed in the first two months of the year, according to Fed analysis of real-time ADP employment data, she said. Job postings are also showing a decline.

However, supply continues to fall short of "still-robust demand" overall, she said. Tighter credit conditions as smaller banks brace for deposit outflows could present a headwind for the economy.

She noted the importance of smaller financial institutions in lending to small and medium-sized firms, adding "I am attentive to whether recent banking developments will restrain credit to small businesses, which could slow innovation and growth in potential output over time."