MNI: Waller Says Fed Policy Likely Needs To Be Tightened

Federal Reserve Governor Christopher Waller said Friday the Fed still has more work to do bring inflation toward the central bank's 2% target, but stands ready to adjust his stance for the May FOMC meeting.

"Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further," Waller concluded in a speech. "How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions."

The Fed governor also suggested he is not expecting rate cuts soon. "Another implication from my outlook and the slow progress lately is that, as of now, monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate," he said.

ADJUSTABLE STANCE

"But there are still more than two weeks until the next FOMC meeting, and I stand ready to adjust my stance based on what we learn about the economy, including about lending conditions."

The failure of SVB and Signature Bank and related developments might have solidified and pulled forward factors that were already tightening lending conditions, or it may be that credit conditions will now be even tighter than they were on track to be, he said.

"Significant tightening of credit conditions could obviate the need for some additional monetary policy tightening, but making such a judgement is difficult, especially in real time," Waller said in a speech in San Antonio, Texas.

"Based on what is already in the public record, SVB seems to have done a terrible job managing its risks," he said.

The FOMC raised its target range for the federal funds rate to 4.75% to 5% at its March meeting, noting recent banking developments are likely to result in tighter credit conditions and to weigh on economic activity. "We didn’t know then, and still don’t know, the extent of these possible effects," Waller said.

(See: MNI INTERVIEW: Fed Close To Done As Credit Tightens–Kroszner)

RESILIENT ECONOMY

Waller said U.S. consumers and businesses are showing remarkable resilience and first quarter growth estimates mean that so far tighter monetary policy and credit conditions are not doing much to restrain aggregate demand.

"Regarding the economic outlook, the data in hand for the first quarter of 2023 continue to surprise me, with stronger growth and job creation than I expected late last year," he said. "Despite some encouraging news on a slowing in housing costs, core inflation does not show much improvement and remains far above our 2 percent inflation target."