U.S. Federal Reserve officials meet next week again chasing persistent inflation but now balancing that against the first acute tremors from the aggressive interest rate hikes the central bank approved over the past year.
The sudden failure of Silicon Valley Bank last week isn’t expected to prevent the Fed from continuing to raise interest rates at its March 21-22 meeting, with inflation still running far above the Fed’s 2% target and Fed chair Jerome Powell indicating monetary policy might need to become even more aggressive.
But it could add a dose of caution to the policy debate and undermine the sense, common among officials so far, that Fed policy had not caused anything to “break” in an economy where spending and job growth have seemed immune to the impact of higher interest rates.
SVB’s failure, which the Fed came to a view as a potentially systemic shock if bank depositors faced losses, prompted the Fed to announce a new bank lending facility on Sunday in an effort to maintain confidence in the system – effectively putting the Fed back in the business of emergency lending even as it tries to tighten credit overall with higher interest rates.
Given the stakes that bit of dissonance seemed unavoidable, and may be accompanied by a slightly softer approach to monetary policy if risks are seen to be intensifying.
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