Trade-offs                   

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By Isaac Cohen*

The art of economic policy making consists in choosing between objectives that may contradict each other. For instance, the US Congress mandates the central bank to pursue both employment and price stability. However, to achieve both objectives may generate one of the best-known trade-offs if inflation can be reduced without increasing unemployment.

The recent performance of the US economy has revealed that job creation can increase vigorously, despite the tightening of monetary policy to control inflation. For instance, after two consecutive years of job creation and a year of interest rate increases, inflation is decreasing, although not as much as expected.

However last week, on the eve of the central bank’s Open Market Committee meeting, turbulence in the US banking sector led to the intervention by the regulatory authorities of three regional, medium sized distressed banks, to avoid panic and contagion.

Therefore, another trade-off has emerged, between financial stability and price stability, because the interest rate increases were one of the contributing factors to the collapse of these mid-size banks. The question is how the central bank will deal with these dilemmas. The answer will be available this Wednesday, at 2 PM, after the release in Washington of the communique issued by the central bank, at the end of the Open Market Committee meeting, followed by the press conference by Federal Reserve Chairman Jerome Powell.  https://www.federalreserve.gov/newsevents/pressreleases.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.

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