Difficult decision: Fed faces rate rise dilemma
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The US Federal Reserves - World's worst job right now
In case you missed it, the US CPI for Feb'23 came in at 6.0%.
It came down from 6.5% in Jan'23.
But it is still far from the 2% target.
So why is the world's worst job right now the US Federal Reserve?
1. To bring down inflation, hiking interest rates is the most effective way
I supposed by now that everyone knows that to curb inflation, hiking interest rates is undoubtedly the fastest way to do so.
That's why the Feds have been doing vigorously for the past few quarters.
2. But what about banking contagion?
And one of the main reasons due to the bank run of SVB was a mark-to-market loss of securities, mainly treasuries that the bank has been collecting during the low-interest period.
So long as interest rates continue to go up, all banks that are holding on to low-interest rates securities will be in a precarious situation.
In short, increasing the interest rates might push some banks too hard until they collapse like SVB.
Increase interest rates or not?
Solving inflation is not straightforward. It's not just increasing the interest rates.
It's by doing so, without bringing the economy into recession, or triggering a banking contagion.
It's pulling out blocks from a Jenga tower, stacking it up to reach a certain height, without making everything collapse.
Unfortunately, it's easier to restart a Jenga game, unlike restarting the global economy when things turn out for the worst...
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mizmo : seems like some backwards engineering needs to be done