(Yahoo! Finance) - Federal Reserve Chair Jerome Powell said Monday that he does not see a risk of contagion in private credit markets at this point that could spread to the wider financial system, though the central bank is watching the situation closely.
"We're looking for connections to the banking system, and things that might, you know, result in contagion. We don't see those right now," Powell said at a Harvard University event.
"What we see is a correction … and certainly there'll be people losing money and things like that, but it doesn't seem to have the makings of a broader systemic event," he said.
Concern has rippled through private credit markets in recent months as more investors moved to withdraw their money following a merger by private credit lender Blue Owl Capital (OWL) that was called off. The event triggered a cascade of redemption requests. At the same time, redemptions increased as fears grew that AI could render traditional software business models obsolete, potentially leading to a surge in defaults among companies that seemed safe. Many private credit lenders hold bonds of software companies.
Powell reiterated that interest rates are in a "good place" to respond to the oil price shock emanating from the Middle East.
"No one knows how big it will be," Powell said. "It's way too early to know. We do think our policy is in a good place for us to wait and see."
Powell acknowledged the series of shocks to inflation over the past six years, first with the pandemic, then tariffs, and now oil prices.
He estimated that tariffs are adding somewhere between 0.5% and 1% to inflation, but that it will be a one-time price increase that will pass through. Absent tariffs, inflation would be closer to 2%, Powell said. Inflation measured by the Fed's preferred inflation gauge, the Personal Consumption Expenditures index excluding volatile food and energy prices, sits around 3%.
Separately, New York Fed president John Williams, who is vice chair of the Federal Open Market Committee and holds a permanent seat, said Monday that he expects the spike in oil prices to boost overall inflation in the coming months, but the effects should partially reverse later this year, assuming oil prices come down after hostilities cease.
He also noted that the war itself could drive an increase in inflation — through a surge in intermediate costs and commodity prices — and dampen economic growth.
Williams, too, believes interest rates are well-positioned now to balance both inflation risks and the job market. He still expects GDP growth this year of 2.5% thanks to tailwinds from fiscal policy, favorable financial conditions, and investment in AI. He expects overall inflation to come in around 2.75% this year before returning to 2% next year. And he expects the unemployment rate to edge down over this year and next, given strong growth.
By Jennifer Schonberger - Senior Reporter
