Yahoo Finance Fed's Bullard: Ripples from bank failures unlikely to cause recession
St. Louis Fed President James Bullard said Thursday he doesn't see reverberations from recent U.S. bank failures likely being enough to tighten credit conditions and send the economy into recession.
"I'm less enamored with the story that credit conditions will tighten appreciably enough to send the U.S. economy into recession," Bullard said Thursday on a call with reporters following a presentation in Little Rock, Ark.
Bullard's rationale revolves around an estimate that 20% of bank deposits are leaving the system in search of yield. Right now, Bullard said it's not clear to him there will be much of a pullback in lending as a result, however.
In his view, as long as banks maintain enough liquidity and capital to extend loans, that lending will happen.
"You're only talking about a portion of the total amount of intermediation that's going on," Bullard said. "It's not big enough by itself to send the U.S. economy into recession. Other things would have to happen."
Some have suggested the Federal Reserve should lower the interest rate on its reverse repo facility to encourage money market funds to lend back to banks. Many money market funds have been parking cash at the Fed, rather than private banks, given higher interest rates. Bullard said right now the Fed has no plans to change that.
Late last month, the Federal Reserve raised interest rates by another 0.25%, bringing the target range for its benchmark rate to 4.75%-5%, the highest since 2007. Bullard is not a voting member of the FOMC in 2023.
Bullard currently places the odds at 85% that financial stress will continue to abate and the Fed will need to be remain focused on fighting inflation.
"The good news about where we are right now is the labor market is very strong and financial stress seems to be abated at least for now," Bullard said. "So it's a good moment to continue to fight inflation and try to get on that disinflationary path."
Bullard says he doesn't take much signal from the recent JOLTS report that showed the biggest decline in job openings in two years, a potential sign that supply and demand in the labor market is beginning to balance out. He says it still seems like a tight labor market and that even if someone does get disrupted, they can likely get another job easily in this environment.
Read the latest financial and business news from Yahoo Finance
