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[Economics] Fed Meets as Bank Chaos Collides With Inflation

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The Federal Reserve entered 2023 focused on a central goal: wrestling down the rapid inflation that has plagued American consumers since 2021. But over the past two weeks, that job has become a lot more complicated.

Many economists expect central bankers to raise interest rates a quarter-point, to just above 4.75 percent, on Wednesday, continuing their fight against rapid price increases. A range of investors and analysts had expected the Fed to make an even bigger rate move until a series of high-profile bank closures and government rescues raised concerns about both the economic outlook and financial stability.

On Sunday, the Fed pumped up its program that keeps dollar financing flowing around the world, its second move in a week to shore up the financial system. The previous Sunday, it unveiled an emergency lending program meant to serve as a relief valve for banks that need to raise cash.

Jerome H. Powell, the Fed chair, and his colleagues must now decide how to react to bank turmoil when it comes to interest rate policy, which guides the speed of the economy. And they must do so quickly. In addition to announcing a rate decision this week, Fed officials will release a set of quarterly economic projections that will indicate how high they expect borrowing costs to climb this year. Central bankers had expected to lift them to roughly 5 percent in 2023 and, before the market volatility, had hinted that they might adjust that anticipated peak even higher in their new projections. 


But now, Fed officials will have to make their next move against a backdrop of banking system instability. They could try to balance the risk of lasting inflation against the risk of causing financial turmoil raising rates more slowly and stopping earlier to avoid fueling more tumult. Or they could try to separate their inflation fight from the financial stability question altogether. Under that scenario, when it came to setting the level of interest rates, the Fed would pay attention to banking problems only inasmuch as they seemed likely to slow down the real economy.

That’s the approach the European Central Bank took last week, when it followed through with plans to raise rates by half a point even as one of Europe’s biggest banks, Credit Suisse, was swept up in the market mayhem.


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