It’s been a year since the Fed began Open Market Operations to deal with high inflation. Through contractionary monetary policy, the Fed has gotten inflation to decrease by 2.5% from 8.5% to 6%. This shows progress, but also indicates that inflation is still a problem because it’s still well above the target of 2%. It’s expected that the Fed will continue raising interest rates in an effort to continue curbing inflation.
I wonder how the Fed’s response will change as a result of the SVB crisis. Will they still continue to increase interest rates, even though this is one of the main reasons the bank collapsed to begin with? Since inflation is still an issue, I think the Fed will just increase interest rates in smaller increments. The Fed should make sure that the hikes don’t cause prices to fall extremely low because that will affect the value of stocks and cause another panic in which people begin to sell and withdraw their money from the banks. I think that restoring consumer confidence will be beneficial in dealing with the aftermath of this banking crisis because that'll help along with whatever monetary policy the Fed decides to enact.
7 comments:
The FED seems to be in a tough spot. They are in a situation where increasing interest rates is the most logical decision to make but it will have drawbacks as well. On the contrary, the decreasing interest rate wouldn't be of many benefits either. It seems like there are limited tools to address the current situation at hand.
The current state of the economy is very concerning. I think we can continue to expect the Fed to increase interest rates as long as inflation is high. There is still much uncertainty as we have seen over the past two weeks with SVB and Credit Suisse. This definitely places the Fed in a difficult spot.
I'm sure the Fed will continue to keep interest rates high and maybe increase them a little bit as well. However, with the SVB the Fed must be very careful to ensure that there isn't a re-occurrence of what caused the 2008 financial crisis. I think the fear of recreating the events that started the financial crisis will cause the Fed to be much more careful. That's why I think they might not increase interest rates much more. They can't let interest rates fall just for inflation to increase because they are still entitled to do their jobs.
The state of the economy is a lot worse than people think and we should assume that the Fed will increase rates to keep up with the high inflation.
Overall, great post! I think it is important to look at this issue from all the angles and you did just that! I think you are right in saying that the key for the fed is to continue to increase the interest rates in small increments. It will be interesting to see how this situation continues to be resolved.
Great post! You bring up some great questions regarding the SVB crisis and how the FED will respond to this. I agree with your statement that the FED should continue to increase interest rates at smaller increments. It will be interesting to see how they continue to respond to the issue of inflation over the next year.
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