One Year After the First Rate Hike, the Fed Stands at Policy Crossroads

Exactly one year ago, on March 16, 2022, the Federal Open Market Committee enacted the first of eight interest rate increases. The Fed aimed to arrest a stubborn inflation wave that central bank officials had spent most of a year dismissing as “transitory.”

Inflation has come down somewhat in the year since, but it still leaves the Fed well short of its 2% goal. Moreover, while grappling with a persistently high cost of living, the Fed is also dealing with a shocking banking crisis.

The Fed Has Fallen Short of Its Goals

While inflation has come down somewhat, it remains well above the Fed’s target of 2%. At 6% now and trending lower, the Fed is still far from achieving its goal. In addition, the persistently high cost of living has challenged policymakers while grappling with the banking crisis.

An Aggressive Tightening Policy Has Led to Significant Dislocations

The Fed has tightened as aggressively as it has, but it has led to significant dislocations rippling through the banking industry, particularly smaller institutions. Unless the contagion is stanched soon, the banking issue will overshadow the inflation fight. Rising rates have hammered banks holding other products like Treasuries, mortgage-backed securities, and municipal bonds. Silicon Valley Bank was forced to sell billions of holdings at a substantial loss, contributing to a crisis of confidence that has now spread elsewhere.

The Fed Is at a Policy Crossroads

The Fed’s policy tightening has created a bull in a china shop, knocking things over and wreaking havoc in the banking industry. The Fed and Chairman Jerome Powell have a critical decision to make in six days when the rate-setting FOMC releases its post-meeting statement. Should the Fed follow through on its intention to keep raising rates until it’s satisfied inflation is coming down towards acceptable levels or step back to assess the current financial situation before moving forward?

Related Facts

• The Federal Reserve has hiked interest rates eight times in the past year.
• As measured by the consumer price index, inflation has come down somewhat over the past year, but it remains above the Fed’s target of 2%.
• The Fed’s aggressive tightening policy has led to significant dislocations, particularly in the banking industry, with smaller institutions being hit the hardest.

Key Takeaway

The Fed’s aggressive tightening policy has had significant dislocations in the banking industry, and rising rates have impacted banks holding otherwise certain products. As a result, the Fed is now at a policy crossroads, and its decision in six days will be critical for the economy’s future.

Conclusion

The Fed’s decision in six days will determine the future of the U.S. economy. While inflation has come down somewhat over the past year, the Fed remains far from its 2% target, and the banking industry is grappling with its crisis. Whether the Fed should continue raising rates or take a step back to assess the current financial situation before moving forward will have far-reaching consequences for the U.S. economy.