Bloomberg News
WASHINGTON — Banks are taking steps to make sure they are prepared to use the Federal Reserve’s last-resort lending facility, but Federal Reserve Chair Jerome Powell said that more can be done.
Speaking during a press conference Wednesday following a meeting of the Federal Open Market Committee, Powell said he has seen an uptick in banks double-checking their abilities to access the central bank’s discount window if they ever need it after Silicon Valley Bank and Signature Bank both struggled to do so before failing earlier this year.
“Banks are now working to see that they are ready to use the discount window, and we are strongly encouraging them to do that — banks broadly,” Powell said.
Powell noted that this spring’s ordeal demonstrated that borrowing from the facility — through which banks can pledge certain assets in exchange for short-term funding — is not as intuitive as some banks assume it to be.
“We did find that, you know, during the events of March … that it’s a little clunky or could be a little clunkier, or not as quick as it needs to be sometimes,” he said. “So, why not be in a situation where you’re just much more ready in case you need access to the discount window?”
In the months since the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, Powell says conditions around banks have largely improved, underscoring the resilience of the sector.
“Things have settled down for sure out there. Deposit flows have stabilized, capital and liquidity remain strong, aggregate bank lending was stable quarter over quarter and is up significantly year over year. Banking sector profits, generally, are coming in strong this quarter, and overall the banking system remains strong and resilient,” Powell said. “Of course, we’re still watching the situation carefully and monitoring the monetary conditions in the banking sector.”
In the weeks and months immediately following the bank failures, Fed officials worried that the events could have a negative impact on the availability of credit to the overall economy, even estimating that the episode could have the implied effect of an interest rate hike or two.
On Wednesday, Powell indicated that the ordeal had less of an impact than originally assumed. He said credit is certainly tighter, especially among institutions similar to those that failed — namely large regional banks — but he noted that it is impossible to separate the impacts of bank failures from the Fed’s monetary policy actions.
“I can’t separate those anymore,” he said. “Basically, we’re just looking at the overall picture, which is one of tightening credit conditions.”
During this week’s meeting, the FOMC members voted to raise the Fed’s benchmark interest rate by a quarter percentage point, bringing the target range for the federal funds rate to between 5.25% and 5.5%, its highest point since 2001.
The move was widely expected by financial market participants despite inflation readings trending down and the labor market showing signs of softening earlier this month.
In bumping interest rates for the 11th time in 12 meetings, the FOMC made good on its June commitment to merely pause its monetary-tightening campaign rather than end it, as some had speculated. The committee also left open the possibility of raising interest rates further at future meetings.
In its official statement, the committee noted that it would “continue to assess additional information and its implications for monetary policy,” reiterating the open-ended stance it outlined in June.
In last month’s quarterly summary of economic projections — a survey of the views of Fed governors and reserve bank presidents on various indicators, such as unemployment, inflation and interest rates — nine of the 18 participants said they expected to raise the target range on interest rates to between 5.5% and 5.75% before the end of the year.
“We’re going to be going meeting by meeting,” Powell said. “And as we go into each meeting, we’re going to be asking ourselves the same questions. So we haven’t made any decisions about future meetings, including the cases in which we’d consider hiking.”
