MNI: Fed’s Waller-Bank Strains Could Warrant Less Tightening

Tighter credit conditions due to recent regional banking strains could reduce some of the need for additional monetary tightening, Federal Reserve Governor Christopher Waller said Friday in uncharacteristically dovish remarks.

“Recent strains in the banking sector may lead to a tightening of price and nonprice conditions for lending. If that is the case, then it might reduce the need for at least some further tightening of monetary policy to lower inflation. The Fed could tighten policy too much if it ignored such a development,” Waller said in prepared remarks to a conference in Norway. (See MNI INTERVIEW: Fed 'Skip' Heralds Premature Pause-Ex-Staffer)

Waller -- who in a May 24 speech focused on a lack of progress slowing inflation -- still said financial stability concerns shouldn't get in the way of the Fed’s resolve to pursue its monetary policy mandate. “The Fed’s job is to use monetary policy to achieve its dual mandate, and right now that means raising rates to fight inflation,” he said.

But he also made clear that financial stresses are a concern for policymakers, who opted this week to keep rates on hold for the first time since the start of rate hikes in March 2022.

“Financial stresses in the banking sector are a factor that my colleagues and I are closely watching as we determine the appropriate stance of monetary policy going forward,” Waller said.

“While lending conditions imposed by banks have tightened since March, the changes so far are in line with what banks have been doing since the Fed began raising interest rates more than a year ago. That is, it is still not clear that recent strains in the banking sector materially intensified the tightening of lending conditions.”

Waller also rejected criticism the Fed should have acted to prevent excesses such as the collapse of Silicon Valley Bank, saying it’s up to private lenders to manage rising interest rates and most have done so. “I do not support altering the stance of monetary policy over worries of ineffectual management at a few banks.”