Powell says rate hikes aren’t a stability risk. Others are less convinced.

Abstract

The Federal Reserve is raising interest rates at its fastest pace in decades in an effort to stomp out inflation, but Chair Jerome Powell says the banking and financial sectors are well equipped to handle the impact. After the Fed's Federal Open Market Committee raised its benchmark interest rate by three-quarters of a percentage point on Wednesday, Powell said well-capitalized banks, responsive markets and strong household balance sheets paint a "Pretty decent picture" of financial stability. "There are plenty of macroeconomic issues that don't rise to the level of financial stability concerns," Powell said after the FOMC raised its benchmark rate Wednesday. Ting Shen/Bloomberg Sri-Kumar is one of several economists and policy experts who believe the Fed's rapid-fire rate increases could be a greater threat than Powell has acknowledged. Changing interest rates faster than capital markets can adjust heightens the risk of defaults on loans and other financial instruments. "Financial stability, you know, we think of that as things that might undermine the working in the financial system. So big, serious things."Yet, Powell's rationale left some unsatisfied. Jeremy Kress, a business law professor at the University of Michigan and a former Fed attorney, said the question of how rapidly rising interest rates will be absorbed by financial institutions of all stripes is too complex to merely consider debt levels and asset prices.