US | The Fed will remain focused on reducing inflation, but faces a difficult balance

Summary

Last week the Fed raised the federal funds rate by a quarter of a percentage point. I think they did the right thing, although they face a considerable challenge.

Key points

• Key points:
• There are important differences between what is happening now in the US financial system and what happened in the global financial crisis of 2008 and 2009, when the Fed pushed interest rates to zero.
• The first is that inflation is now a bigger problem.
• The second is that today the banking system in the United States is much more solvent than it was at that time. In response to that crisis, the regulatory framework was strengthened, requiring banks to have more and better capital, that is, with a greater capacity to absorb losses.
• These differences will allow the Fed to use monetary pólicvy to continue fighting inflation while using other mechanisms (like liquidity facilities) to tackle financial instability.

Geographies

Topics

Tags