Larry Berman on the difficulty the U.S. Federal Open Market Committee faces with the fastest rate hike cycle in history and their intended and unintended consequences.
Minneapolis U.S. Federal Reserve president Neel Kashkari in an interview last month said, “If inflation is going to fall quickly … we might be in a position to be able to cut rates, if not this year, then soon in the new year. But if, on the other hand, inflation is much more persistent and much more entrenched … then I think the stresses in the banking sector probably become more serious.”
The rapid rate hikes caused severe stress in regional banks in March, which led to the insolvency of two large banks and the takeover of another. In order to sooth the market, the FOMC applied their so-called separation principle. Emergency lending via regulatory tools to address the financial stability while continuing to fight inflation by raising rates. It was the higher rates that caused the stress for these banks and the issues have not been resolved yet.
The FOMCs other mandate is inflation, which will get a CPI update this week and based on the strength in equity markets, investors seem confident that inflation will come down so the FOMC can eventually cut rates. We are not so sure that core will come down fast enough.that says, “If the Fed is genuinely data dependent and truly committed to achieving its current inflation target of 2 per cent, it should raise rates by 0.25 percentage points and leave the door open for additional hikes.
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