Powell signals more rate hikes in 2023, tighter rules for banks

Speaking in Spain on Thursday, June 29, Federal Reserve Chair Jerome Powell discussed the possibilities of more rate hikes in 2023, as well as tighter rules for banks following the failure of several large banks in recent months. Powell’s comments came at a banking conference in Madrid, a day after Powell participated in a panel with other global central bankers at the European Central Bank’s (ECB) annual policy conference in Sintra, Portugal.

“As noted in the [Federal Open Market Committee’s] Summary of Economic Projections, a strong majority of Committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year,” Powell said Thursday. “Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”

Powell did not say when those rates hikes may come. After 10 straight rate hikes dating back to March 2022, the Fed opted to leave its policy rate unchanged at the 5%-5.25% range at its meeting earlier in June.

Powell further elaborated on his expected timeline for returning inflation back to the Fed’s target rate of 2% at the ECB panel. He said he doesn’t expect inflation to hit that target until 2025.

“I see us making progress,” Powell said. “Steady progress, this is core inflation – headline inflation is coming down that was lower than core – but core inflation, I don’t see us getting to 2% this year or next year.”

In addition to rate hikes, Powell said the Fed may have to tighten its rules over banks. Speaking at the Madrid bank conference, Powell said while tougher regulations put in place after the 2007-2008 financial crisis have made banks more resilient to widespread loan defaults, the recent collapses of Silicon Valley Bank, Signature Bank and First Republic Bank exposed additional vulnerabilities that the Fed may have to address.

“SVB’s vulnerability came not from credit risk, but from excessive interest rate risk exposure and a business model that was vulnerable in ways its management did not fully appreciate, including a heavy reliance on uninsured deposits,” Powell said. “These events suggest a need to strengthen our supervision and regulation of institutions of the size of SVB. I look forward to evaluating proposals for such changes and implementing them where appropriate.”

Such proposals are likely to face resistance from the banking industry and some congressional Republicans. They argue the Fed had the tools necessary to prevent the bank collapses, but failed to use them.