Fed official focusing on duration of high interest rates rather than another hike

By Ovunc Kutlu

ISTANBUL (AA) – US Federal Reserve Vice Chair of Supervision Michael S. Barr said Monday that he is keeping his focus on the duration of high interest rate levels rather than the need for another rate hike.

"In my view, the most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals. I expect it will take some time," Barr said in his speech at the Forecasters Club of New York.

“There is a robust debate about the lags of monetary policy transmission; how long it takes for past tightening to come into full effect. While these lags are difficult to estimate, I expect that the full effects of past tightening are yet to come in the months ahead," he added.

The Fed last month skipped an interest rate increase for the second time this year, keeping the federal funds rate unchanged between the 5.25%-5.5% target range, which is the highest in 22 years, after making a total of 11 rate hikes since March 2022 to tame record inflation that climbed to its highest level in more than 40 years last summer.

"While inflation has been moderating, incoming data on economic activity have shown considerably more resilience than I had expected. We are being helped by improvements in supply," Barr said.

"I now see a higher probability than I did previously of the US economy achieving a return to price stability without the degree of job losses that have typically accompanied significant monetary policy tightening cycles. However, the historical record cautions that this outcome could be quite difficult to achieve," he added.

Barr, who is the Fed's top regulator on banking, noted that while most banks were well positioned to handle rate increases, higher interest rates had a severe effect on the balance sheets of banks that had not managed their interest rate risks appropriately.

After the sudden demise of Silicon Valley Bank and Signature Bank in March, First Republic Bank and Silvergate Bank abruptly failed in the following weeks.