Some Additional Hikes. Maybe.

“How confident” is the Fed that America’s banking crisis is “contained,” a reporter from the Financial Times wondered, during Wednesday’s Q&A with Jerome Powell.

It was the first question he fielded. “Thanks,” he said flatly, before getting to an answer.

The Fed’s view is that the US banking system is sound. All deposits, Powell indicated, are safe, and deposit flows have stabilized. It was the second time in as many days that one of America’s two top economic officials implicitly guaranteed all deposits.

On Tuesday, during remarks to the American Bankers Association, Janet Yellen said that+ “similar actions” to those the Treasury and Fed took earlier this month in response to SVB’s failure “could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Powell’s press conference — which followed what could be the final rate hike of the cycle — was obviously dominated by questions about the financial system.

He said the Fed “did consider” a pause at this month’s meeting (there was no discussion of changing balance sheet policy). “The data on inflation and the labor market were robust,” he said, and before recent events, the Committee was “clearly on track” for “ongoing rate hikes.” But… well, then came the bank runs.

Although he emphasized how crucial it is that the Fed “sustain” what he imagines is public “confidence” in the Fed’s inflation-fighting prowess, he was fairly adamant about the prospect of bank stress and associated tighter lending standards doing some of the work for the Fed.

“In principle,” you can think of the likely fallout from recent events “as a rate hike or perhaps more than that,” he said, before summarizing the new, much softer, forward guidance using his trademark “Plain English”: “Some additional hikes maybe.”

CNBC’s Steve Liesman picked up on the same question I had — namely whether the Fed’s choice of the word “firming” in the statement might mean that any additional policy tightening could take a form other than rate hikes. Powell dismissed that. “No,” he said, adding that markets should focus on the words “may” and “some.”

It’s possible, Powell reiterated, that prospective tightening in the banking sector will mean monetary policy “will have less work to do.”

Asked by Wall Street Journal “Fed whisperer” Nick Timiraos whether that prospective tightening was incorporated into the new SEP, Powell essentially said it was. “What I heard was a significant number of people saying they anticipated some tightening in credit conditions,” he told Timiraos. “They included that in their assessment.”

Queried on why the systemic risk exception was invoked to protect SVB and Signature depositors, Powell was forthright. “The issue was really not about those specific banks but more about the contagion,” he said.

Reuters wondered if the disinflationary trends Powell lauded last month were still in place, given the run of hot data that preceded the banking meltdown. “The story is still intact,” he said, calling disinflation in housing services “a matter of time,” before lamenting that “we still don’t have signs of progress” in services ex-housing. That, he suggested, will have to “come through softening demand and some softening in labor market conditions.”

The New York Times asked what Powell thinks happened at SVB. Not surprisingly, he didn’t mention a dozen years of policies aimed specifically at encouraging market participants of all shapes and sizes to take more risk in the pursuit of scarce yield, which in SVB’s case meant taking on considerable duration risk. Instead, he blamed executives at the bank (including the one who sat on the San Francisco Fed board) for not managing that risk properly.

“At a basic level, SVB management failed badly,” he said. “They exposed the bank to significant liquidity and rates risk and didn’t hedge it properly.” He called the rapidity and scope of the bank run “unprecedented and massive.” It was a “fast run,” he mused.

As for whether Americans can be confident there aren’t similar risks lurking out there (the Times asked that too) the answer is “No,” but that’s not the answer Powell gave. SVB’s risk profile isn’t prevalent, he said.

Relatedly, The Washington Post took a break from quizzing Powell on how many jobs the Fed’s rate hikes are likely to cost to ask about commercial real estate risks at regional banks. Powell’s response (forgive me) was of the “famous last words” variety. “I really don’t think it’s comparable to this,” he ventured.

Bloomberg’s Mike McKee asked if markets were wrong to price in rate cuts during the back half of 2023 given the new forward guidance. Powell said cuts are “not our baseline expectation,” and later said the Fed is still willing to “raise rates higher than expected” if necessary.

One way or another, Powell told reporters Wednesday, policy has to be restrictive enough to bring inflation back down to target. “It doesn’t all have to come from rate hikes,” he said, adding that the Fed “will do enough to bring inflation down to 2%. No one should doubt that.”