Whether you want to admit it or not, the Federal Reserve (Fed) has given us a master class in monetary policy in times of turbulence in recent days. It already seems commonplace to point out the difficult dilemma of guiding monetary policy decisions while simultaneously fighting against inflation and the prospects of a future recession.
When we refer to this dilemma we are focusing solely on the balance of risks between production and growth. Such is the case of the Federal Reserve, which by law has the double mandate of promoting employment and growth and at the same time controlling inflation, two objectives that are almost always conflicting.
Additionally, central banks also have a shared responsibility to regulate the banking system. It is almost always taken for granted that this works reasonably well, but reality showed us a couple of weeks ago that this is not always the case, and now the Federal Reserve finds itself in a game of two tracks over which it has to simultaneously fly over the ship.
The bankruptcy of Silicon Valley Bank (SVB) and the nervousness it is causing in the US and world financial system would have led many to think that the Fed would pause the restrictive cycle of interest rates to avoid tighter financial conditions for banks. commercial.
But the Fed surprised the market and last Thursday decreed a 25 basis point hike in the federal funds rate. Thus, the North American central bank is masterfully managing the monetary policy tools that mark the textbooks on the subject.
And it is that the signal that it is sending is as simple or confusing as you want to see. In the first place, he is assuming a very clear and inalienable position on his unconditional commitment to control inflation. There are not a few analysts who support the thesis that the Fed wants to induce a slight recession that will allow it to return to inflation levels below 2 percent.
Let’s remember that the federal funds rate is nothing more than an objective that the Federal Reserve pursues of the average interest rate at which the banks lend to each other. If this rate in the market is below the target set by the Fed, it will restrict monetary conditions as necessary for the same market conditions to take it to the desired level.
Secondly, the fact that to date there have been historical levels of loans requested by commercial banks through the Fed’s discount window is also a sign that it is willing to provide liquidity to banks. they need, as well as allowing any bank that has irresponsibly compromised its business model to pay the consequences, as happened with the SVB.
In short, a masterful two-lane game so far. While with one arm of monetary policy it tightens financial conditions looking at inflation, with the other arm it supplies liquidity to banks to avoid a domino effect. Meanwhile, the threat of a recession looms out the window
Economist and professor at the Faculty of Economics of the UAdeC