By Isaac Cohen*
Despite recent turbulence among some regional banks, the central bank of the United States reiterated, last week, its strong commitment to returning inflation to its declared objective of 2 per cent, approving the ninth consecutive increase in the federal funds interest rate to 4-3/4 to 5 percent.
The central bank has different tools to maintain both financial and price stability. Financial stability requires tighter regulation and supervision of the banking sector, together with exercising the central bank’s function of lender of last resort. Fighting inflation demands higher interest rates and reducing the central bank holdings of securities.
However, higher interest rates can hurt bank assets, while depositors may lose confidence in the banking system. By contrast, as described after last week’s meeting by Federal Reserve Chairman Jerome Powell, “a tightening in financial conditions would work in the same direction as rate tightening… the equivalent of a rate hike or perhaps more than that.” As stated in the central bank’s communique, recent events in the banking sector, “are likely to result in tighter credit conditions for households and businesses and weigh on economic activity, hiring and inflation.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20230322a.htm
*International analyst and consultant, former Director ECLAC Washington. Commentator on economic and financial issues for CNN en Español TV and radio, UNIVISION, TELEMUNDO and other media.