MNI INTERVIEW: Fed Likely To Hike 25BPs Next Week- Ex Official
FOMC must quickly restore banking system confidence, former senior NY Fed official Cecchetti says.
The Federal Reserve will likely approve a quarter-point interest rate increase next week as focus shifts from strong economic data to restoring confidence in the banking system, former senior Bank for International Settlements official and ex-New York Fed research director Stephen Cecchetti told MNI.
The possibility of a half-point hike -- even as strong job and inflation data warrant such a move -- appears out of the question. Pressing ahead with a rate increase after the collapse of Silicon Valley Bank and Signature Bank is a needed signal of Fed confidence in a financial system where the vast majority of firms are in good shape, he said. (See: MNI INTERVIEW: Ex-FDIC's Bair Sees Limited SVB Contagion Risk)
"I would try to get that message out as broadly, clearly and quickly as possible, and then I would raise interest rates. Does that mean you're probably going to go 25 now instead of 50 and then postpone further increases? Probably yes," Cecchetti said.
Pausing would be a "very bad signal," said Cecchetti, now a finance professor at Brandeis International Business School. "It would be read as you’re really worried about the financial stability consequences of further interest rate increases and you’re willing to compromise your inflation objective."
INFLATION REMAINS 'SUBSTANTIAL'
The U.S. banking system has buffers in place to absorb losses from bonds that have decreased in value as interest rates have risen, Cecchetti said. Yearly stress tests show banks will show "very modest losses, if any" as interest rates rise, he said.
"That doesn't mean people aren't worried. So the problem right now is you have to regain credibility for the authorities more than anything else," he said.
A pause in the Fed's hiking campaign isn't likely to do that, especially in light of stronger than expected jobs and CPI reports, he said. Inflation persistence is "really substantial," with shelter price indexes rising 8% over the year and dining out prices up 8.4%.
"What I would do is still raise interest rates and have a discussion of 25 versus 50. I would telegraph the terminal rate is still going to be closer to 6% than 5%," he said. "These data would unequivocally favor 50. It’s hard to justify slowing down based on the idea there are financial stability concerns because 99.9% of the system looks fine."