The banking meltdown put the Fed in a bind
March 17, 2023 at 11:33
At the same time, inflation remains well above the central bank’s goal of 2%, economic data continues to show labor market strength and consumer spending resilience, and Fed officials have signaled their intent to tighten monetary policy aggressively until price hikes ease.
In prior years, the Fed was able to respond “unswervingly” to financial risks by loosening policy without worrying about price stability, he said.
But conditions today are “very different with inflation still too high.”So what should policymakers do at their March 21-22 meeting?
The reputation play: The question isn’t about what the Fed should do, it’s about what the Fed will do, said Daco.
Lagarde opted to portray that rate increase as a signal that the financial system remains strong.
The central bank has the tools if needed to respond to a liquidity crisis “but this is not what we are seeing,” she told reporters on Thursday.
The ECB’s stance opens the door to larger hikes from the Fed next week.
The dual-track approach: The Fed will likely borrow another tactic from the ECB: To carefully distinguish its inflation-fighting campaign from its work to contain financial system woes.
By implementing this dual-track approach, “the Fed would be able to continue tightening monetary policy gradually while closely monitoring financial market developments,” said Daco.
Prior to the current stress in the banking sector, Fed officials were hinting that they would hike rates by half a point.
“Every central bank tightening cycle in history has induced some sort of financial strains,” she wrote Thursday.
Speaking of lifelines, beleaguered megabank Credit Suisse may need more help to stay afloat, reports CNN’s Mark Thompson.