Changes in Credit Conditions Amid Silicon Valley Bank Failure
U.S. Federal Reserve Governor Christopher Waller stated that changes in credit conditions since the failure of Silicon Valley Bank in early March are “in line” with financial tightening that was already underway due to Federal Reserve interest rate increases and don’t yet point to a material shift in how banks are doling out and pricing loans.
Monitoring Financial Stresses in the Banking Sector
Waller mentioned at a financial stability conference in Norway that 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.
He also noted that financial stresses in the banking sector are a factor he and his colleagues are closely watching as they determine the appropriate stance of monetary policy going forward. He emphasized that the Fed could tighten policy too much if it ignored the possibility that banks were restricting credit more forcefully than needed to lower inflation for fear they might lose deposits or face other liquidity strains.
Fed Rate Increases and Inflation Targets
Although Waller did not comment on the upcoming July Fed policy decision in his prepared presentation, his comments highlighted the step back from concerns that a string of regional bank failures might tighten financial conditions in the same way as Fed rate increases, raising the risks of the Fed going too far if it added further rate increases on top of that.
This notion was partly behind the Fed’s decision this week to delay further rate increases for at least a single meeting, allowing them to assess the financial system and the economy overall.