The Fed Wants to Fight Inflation and Stabilize Banks, Good Luck

The Fed Wants to Fight Inflation and Stabilize Banks. Doing Both Is Tricky. How will the Federal Reserve balance price and financial stability? That’s the question troubling the market ahead of next week’s rate-setting Federal Open Market Committee meeting. Before Silicon Valley Bank’s sudden collapse last week triggered a banking crisis, the Fed had the luxury of focusing its attention on fighting inflation. Recession and financial crisis felt distant. No longer. The Fed opted to close multiple banks, cover uninsured deposits, and launch an emergency liquidity facility. Those actions revealed a potential dilemma: Policy could be too tight for the financial system but still not tight enough for the wider economy. In this awkward situation, monetary policy is pulled in two directions. Tightening policy further would help bring inflation back down to acceptable levels, but it could further destabilize the banking system. The two goals are in tension. The Fed has responsibility for both, so what will it do? There is no playbook, but it will do as much and as early as it can on the banking system so it has space to maneuver on inflation.