Federal Reserve Governor Philip Jefferson said that credit availability has contracted as banks tighten lending standards but he was hopeful the economy would continue to grow.
(Bloomberg) — Federal Reserve Governor Philip Jefferson said that credit availability has contracted as banks tighten lending standards but he was hopeful the economy would continue to grow.
“We have the data showing that banks have started to raise lending standards and that has contracted the availability of credit,” Jefferson said Tuesday at a forum sponsored by the Atlanta Black Chambers.
“That is typical for where we are in the economic cycle,” after the Fed’s rate hikes over the last year to cool prices.
“I am of the view that inflation will start to come down and the economy will have the opportunity to continue to expand,” he said.
The US banking sector has been roiled by the failure of four regional lenders, fanning concern that the strains could tip the economy into recession.
A quarterly survey of lending officers, released by the Fed Monday, showed that banks reported tighter standards and weaker demand for loans in the first quarter, extending a trend that began last year.
“The credit constraints that you may be now sensing is a natural part of the transmission mechanism of monetary policy,” Jefferson said.
Jefferson is President Joe Biden’s choice to become the next Fed vice chair, according to people familiar with the decision, replacing Lael Brainard who has moved to lead the White House’s National Economic Council.
He’s expected to announce his pick in coming days, the people said.
US central bankers have raised the benchmark lending rate ten consecutive times to a range of 5% to 5.25% as they try to constrain too-high inflation.
Their preferred price measure rose 4.2% for the year ending March, and has been above their 2% target since 2021.
The Federal Open Market Committee, the Fed panel that sets interest rates, hinted in a statement following its two-day policy meeting last week that it may pause the most aggressive tightening campaign since the 1980s to assess how the cumulative restrain is impacting the economy.
Cracks started to appear in the US banking system in March as banks struggled with deposit outflows while their securities portfolios had sustained losses from the rapid rise in rates.
Four banks collapsed from March to May, including Silicon Valley Bank, which was directly supervised by the Fed.
(Updates with more Jefferson comment in sixth paragraph.)
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