“Your state trooper dad wrote you a ticket?”
A girl I knew in high school caused a wreck in front of her house. Her dad ran out of the house to make sure she was OK. Once he knew she was unhurt, he walked back into the house and got his ticket book. It was a difficult day to wear two hats. He was a dad and a state trooper. Unfortunately, the Federal Reserve is struggling to wear two hats as well.
The Federal Reserve wears two hats. One for being responsible for the “overall economy” (macroeconomy) and the other for protecting the “banking system.” Their different hats have been fighting each other in the past few days. The battles they’re fighting are untamed inflation and the banking system that is shakier than it should be.
On March 22, with its overall economy hat on, it continued fighting high inflation via raising rates by 0.25% and signaled it’d do it one more time.
But just a few days before, with its banking system hat on, the Fed began lending $25 billion to banks to shore up deposits for customer withdraws. Banks were so concerned about having enough cash that they borrowed a record amount from the Fed for a single week, breaking the record set during the 2008 financial crisis, according to Liz Ann Sonders of Charles Schwab.
These two Fed hats are sometimes friendly fire for the other hat. For example, raising rates is supposed to bring down inflation, but creating 25 billion dollars out of thin air causes more inflation.
By creating cash for the banks, the Fed has effectively restarted “quantitative easing” to quell the bank panic. So it’s fighting inflation with one hand and causing it with the other.
Usually, raising rates works in fighting inflation. The higher interest rates make it more expensive to borrow money, making banks loan less money. Fewer loans make less money go into the economy, which slows down new business and brings down inflation.
It works until it doesn’t. This slowing down of the loan business slows the economy but hurts bank profits. The loss of profit can cause some banks to fail and others to come close to failing, which causes panic among the American people. There is a Wall Street saying, “The Fed tightens until something breaks.” Well, weaker banks are starting to break.
The Fed’s recent decisions tell us that the banking crisis isn’t as bad as it looks and that high inflation is still a bigger threat. The overall economy had won out this time around. Inflation should improve in the last half of this year, and the banking crisis will calm in time.
My high school friend was always teased that she could do anything because her dad would never write her a ticket. She learned her dad was a dad first but would always do what was right. I think the Fed is doing what’s right too, though it’s hard to swallow.
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