Right balance for Fed?
Updated: Jun 4
The Federal Open Market Committee raised the federal funds interest rate to an upper bound of 5% today, following their March meeting. Their press release indicates ongoing concerns that robust spending, tight labor markets, and still-high inflation justify the rate hike. While the Fed acknowledged concerns that recent banking problems are likely to result in somewhat tighter lending conditions, they clearly believe that inflation trumps these concerns--at least for now.
The Fed's two-pronged approach to the twin ills of inflation and banking sector security seem appropriate. Over the past week, the central bank has accommodated the extra cash needs of financial institutions through a special program for Silicon Valley Bank and other directly affected institutions, and it has permitted a high volume of general financial institution borrowing at the discount window. According to the AP, the Fed lent about $300 billion to financial institutions over the past week, more than half of that at the discount window. This meets the Fed's need to provide liquidity in times of crisis.
Today's interest hike need not be seen as inconsistent with this goal. While it is true that the financial turmoil has likely raised the cost of finance for some borrowers, estimates of the effect are all over the place. (Chairman Powell suggested this is perhaps equivalent to a rate increase or more.) Today's quarter point rise sends the signal that inflation is still job one, but the increase is small enough not to be destabilizing. We and the Fed will be watching real economic activity and banking stability closely before the next FOMC meeting, scheduled for May 3.