As analysts start to speculate about the Federal Reserve’s next rate move as a potential credit crunch looms over markets, one former Fed bank president advised extreme caution with their decision.
"If I were sitting in my old seat at the Dallas Fed, I would not raise rates here at the moment," former Federal Reserve Bank of Dallas President and CEO Robert Kaplan said on "Mornings with Maria" Friday. "I would have what I call a hawkish pause. I wouldn't have raised rates in this most recent meeting either."
Last week, the Federal Reserve raised its benchmark interest rate by a quarter of a basis point, at a range of 5% to 5.25%, but opened the door to a long-awaited pause in its most aggressive tightening campaign since the 1980s.
But for the first time in a year, policymakers signaled that future rate increases are not a given, suggesting that additional policy moves will hinge on "incoming information."
"In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the Fed said in its post-meeting statement.
Kaplan expressed worries that another rate hike would "disproportionately" tighten the vise on small and mid-size banks and businesses.
"This last two months hasn't really hurt the finance ability of big companies. It's disproportionately hurt the finance ability of small, mid-size companies," Kaplan explained. "And I would, if I were at the Fed, I'd want to digest this more."
"If I were sitting in my old seat at the Dallas Fed, I would not raise rates here at the moment."
The Fed acknowledged that sentiment this week in a new survey which indicated the share of banks tightening terms on commercial and industrial loans for medium and large businesses rose to 46%, up from 44.8% in the fourth quarter of 2022.
"It’s true the Fed is trying to create this tightening and create a slowdown to cool inflation. What I'm worried about is, after we go through this downturn, you need the muscle of small, mid-size banks and the muscle of small, mid-size businesses that rely on those banks to power us out of this downturn. And that muscle is being impaired to some degree right now," Kaplan said.
With the former Dallas Fed president noting COVID relief and Inflation Reduction Act money still running through the system, as well as increasing demand for goods, services and workers, he called for a "whole of government approach."
"It can't just be the Fed fighting inflation because I worry that more rate increases are simply pushing on a string and disproportionately hurting small, mid-size businesses," Kaplan said.
"So I would pause for now," he continued, "but I'd signal the intention to be vigilant and be prepared to increase down the road if we need to."
When asked if Americans will experience a credit crunch or recession later this year, Kaplan gave a less-than-optimistic answer.
"I think inflation is going to be very sticky, below 4%, because there are 50 million workers in the United States who make $50,000 a year or less who can't make ends meet, and they need to get paid more. And that's about a third of the workforce," the former Fed president pointed out. "So we're going to see a slowing in GDP. Whether it's a recession or not, I don't know, but I think you should expect to see a slowing."
FOX Business’ Megan Henney contributed to this report.