MNI FED WATCH: Fed Nears Cycle End But Leaves Open Hikes

The Federal Reserve is closer to ending its historic tightening cycle with a potential pause in June but is leaving open the potential for more tightening as the length and extent of banking issues is uncertain and it is unclear how much credit will tighten.

"We are prepared to do more if greater monetary restraint is warranted," Powell told reporters in a press conference Wednesday, adding the the central bank will be driven by the incoming data and that the fed funds rate "may not be far off" or "may possibly be at that level" of sufficiently restrictive that is needed to bring inflation back down to 2%.

The Fed chair also again pushed back on the idea of cutting interest rates this year. "We on the Committee have a view that inflation is going to come down not so quickly. It will take some time and in that world, if that forecast is broadly right, it would not be appropriate to cut rates. We won't cut rates." Still, the market is pricing in a cumulative 74bp of cuts to 4.3% by the end of year, with cuts starting in September.

Support among FOMC members was very strong for the 25 basis point increase Wednesday to a range of 5% to 5.25%, he said. "People [on the FOMC] did talk about pausing but not so much at this meeting."

SLOW GROWTH

In addition to inflation and the labor market, key to the outlook will be credit availability and how much banks pull back lending. "Mid-sized banks some of them have been tightening their lending standards. Banking data will show that lending has continued to grow but the pace has been slowing really since the second half of last year," Powell said, also noting a tightening of lending standards in the Senior Loan Officer Opinion Survey to be released May 8.

The labor market is "extraordinarily tight" but Powell noted there are some signs that supply and demand in the labor market are coming back into better balance. In broad terms, wage growth needs to fall to around 3% to be consistent with 2% inflation over a longer period of time, but wages are not a principal driver of inflation today, he said.

Powell predicted slow growth and not a recession, despite Fed staff forecasting a mild recession later this year. "I continue to think that it's possible that this time is really different and the reason is there is just so much excess demand in the labor market," he said.

"The case of avoiding a recession is in my view more likely than that of having a recession. But it's not that the case of having a recession -- I don't rule that out either. It's possible that we will have what I hope would be a mild recession."

FED FACILITY

As the Fed watches credit and the banking sector, Chair Powell pushed back on notions the central bank's overnight reverse repo facility is contributing to banking stress by making it more attractive to investors.

"We looked at that very carefully. It is really not contributing" to stresses, Powell said. The overnight reverse repo facility is "there to help us keep rates where they are supposed to be and it is serving that purpose very well." (See: MNI POLICY: Fed Resists Pressure To Retool QT, Reverse Repo)