June 5, 2023

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Chicago Fed President Goolsby: The Beginning of the Credit Crisis

Chicago Fed President Austin Goolsby warned Monday that a tightening of credit is underway and that a recession is likely.

“The credit crunch has begun, or at least the credit crunch,” Goolsby told Yahoo Finance LIVE in an exclusive interview, when asked how he views credit conditions in light of the many bank failures over the past two months.

Goolsby’s comments followed his vote last Wednesday to raise the Federal Reserve’s policy interest rate by a quarter point.

Goolsby worries about a slowdown in lending as the debate over raising the country’s debt limit comes to a head. President Biden and House Speaker Kevin McCarthy are set to sit down on Tuesday to discuss ways to avoid a default on the country’s debt that could come as early as June 1.

“I think you should say that recession is a possibility,” Goolsby said, cautioning: “Don’t land the plane in the nose of the plane.”

He says the Fed needs to take recent bank pressures and credit conditions into account when setting monetary policy, although before the next meeting it is too early to say whether or not to pause.

“We have to see how much monetary policy work is actually being done through credit terms, and we have to be aware that that is not going to be evenly distributed across the country,” he said.

He said he would pay attention to a large survey of loan officers the Fed conducted during the first quarter, which is expected to show a slower pace of lending and tightening of standards from banks as the turmoil that gripped the industry in March. This poll is expected to be released today.

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He said the labor market is another key area of ​​scrutiny by the Fed. He said he likes to scrutinize the labor market over a three-month period, and focus on the total hours worked by everyone in the economy, not just the number of jobs.

He says that total hours worked were not growing as vigorously as total job growth would suggest. “Looking at what happens to the posts, this seems to be cooling the foam off the top of it,” he said.

Debt ceiling argument comes at ‘worst possible time’

Gooslbee has been through a debt ceiling battle before.

When he served as chairman of the Council of Economic Advisers under President Barack Obama, he witnessed a confrontation between Republicans and Democrats over tying spending cuts to raising the debt ceiling.

He said the new argument comes “at the worst possible time”.

“We’re trying to figure out what’s a very strange business cycle coming out of the pandemic, and we’re weighing that against the tightening caused by bank failures and uncertainty, and adding to that uncertainty about whether the government is going to pay its bills,” says Goolsby.

He says a lot of potential “weird things” could happen in financial markets if lawmakers’ negotiations go backwards before a deal is reached.

“I worry about things like are we going to reignite a set of banking stresses where financial institutions have Treasuries as collateral,” says Goolsby.

On the consumer side, you’ll see rising interest rates on mortgages, auto loans, credit cards, and a whole host of things directly related to Treasury rates. I think you’ll have a lot of trouble.”

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Goolsby said lawmakers should raise the debt ceiling. “There is no other alternative. So let’s hope they can get that message across.”

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