ANALYSIS | Bank failures offer Jerome Powell new lessons as U.S. Federal Reserve makes policy on the fly | CBC News

Crisis is a great teacher — for central bankers and for the rest of us.

Canadians who thought money was an unchanging unit for earning, saving and spending learned their lesson from a year of inflation.

And anyone who thought banks were glorified instant teller machines certainly learned something over the last two weeks as they watched contagion from the disintegrating Silicon Valley Bank (SVB) help bring down Swiss banking giant Credit Suisse.

Just over a year ago, the world’s most powerful central banker, U.S. Federal Reserve chair Jerome Powell, admitted that inflation caught him by surprise. On Wednesday, Powell said he still had a lot to understand about why and how those banks collapsed and the effect on inflation and the economy.

“We are committed to learning the lessons from this episode and how to prevent events like this from happening again,” Powell told reporters at the central bank’s monetary policy news conference.

And there is plenty more to learn about the impact of those events and when the disruption will be over. The Fed chair said that as banks restrain their own lending to try to prevent themselves from getting into trouble, ordinary people are going to feel the effects — including making it harder for them to get loans and a slowing down of economic growth.

“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” Powell said. “It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.”

Didn’t see it coming

One monetary policy response was for the central bank to pare its rate hike to a quarter-point instead of the half-point increase expected early this month.

Only days before SVB crumbled, Powell had testified to Congress that the Fed would likely have to raise rates higher and faster to fight rising prices — clear evidence he did not see the banking turmoil and its disruptive effects coming.

The change takes U.S. central bank rates into the 4.75 to five per cent range. That compares with the Bank of Canada’s Canadian policy rate target of 4.5 per cent. However, Canadians trying to obtain or renew a five-year mortgage may still be affected because longer-term Canadian borrowing is strongly influenced by U.S. bond rates.

For Canadian and U.S. long-term borrowers, a quarter-point increase is better than a half. But the implication of those “tighter credit conditions” means banks may be fussier about whom they lend to.

While Powell echoed Treasury Secretary Janet Yellen’s recent comments that U.S. banks were “safe and sound” and that depositors would not lose their savings, the Fed still remains unsure about how long distress in the banking sector will last. He said there was a lack of precision about how negative an impact it will have on the economy.

In fact, in their discussions just prior to Wednesday’s policy announcement, Powell said he and his panel of advisers had seriously considered following Canada’s lead and pausing interest rate hikes altogether.

Economists from at least one  financial group, Japan’s Nomura, had suggested the Fed would actually cut rates by half a per cent.

Despite repeated signals from financial markets — based on bets on where interest rates will go next — that the Fed will cut interest rates before the end of the year, Powell scoffed at the idea, saying the central bank had no plans for, and did not foresee, rate cuts in 2023.

Impact on rates still uncertain

But such a short time after an entirely unexpected disturbance in the banking sector, the impact on interest rates remains uncertain.

“We simply don’t know,” Powell said.

While he said there had been fears the takeover of Credit Suisse by its former Swiss competitor, UBS, would not go well, that seems to have changed.

“I would say that it has gone well.” But then Powell paused before adding, “So far.”

Asked by one reporter how the American public could be confident in their banking system when signals about SVB’s failure “got missed” by regulators, Powell explained some of the things that made the bank’s case unique, including growing too quickly and taking too many risks.

But there were also technical considerations. Powell described an “unprecedentedly rapid and massive bank run” as a large group of well-connected and technically adept depositors withdrew their money “faster than historical records would suggest,” he said.

Despite fears from some bankers — including Scott Anderson, president and CEO of Utah-based Zions Bank — that a 2018 rollback in regulations will get the blame and result in new tighter rules, Powell insisted that the central bank has to learn enough to find out what happened and prevent a recurrence.

“My only interest is finding out what went wrong … to make an assessment of what are the right policies to put in place so it doesn’t happen again, and then implement those policies,” he said.

WATCH | As inflation rate drops, food prices still on the rise:

Food prices still rising despite inflation rate drop

Canada’s inflation rate dropped to 5.2 per cent in February, the biggest slowdown in inflation since April 2020. But the cost of food is still increasing for the seventh month in a row.