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The Fed’s Credibility Problem

The US Federal Reserve's growing list of policymaking, supervisory, and communications failures is becoming increasingly consequential not just for Americans but also for the rest of the world. The global economy's single most important institution has lost its way and must urgently address two structural deficiencies.

CAMBRIDGE – Reacting to Silicon Valley Bank’s sudden collapse, André Esteves, a senior Brazilian banking executive, recently told Bloomberg that “SVB’s interest rate risk would’ve been obvious to any banking intern in Latin America.” To some, this remark will sound rather rich coming from a region that has had no shortage of banking-sector problems. Nonetheless, Esteves’s sentiment is revealing, because it reflects mounting concerns around the world about the US Federal Reserve’s policymaking and its adverse spillover effects on other countries.

There are good reasons to be concerned. Just in the last three years, the Fed has mishandled its interest-rate hiking cycle, faced insider-trading allegations, stumbled in its supervision of banks, and, through inconsistent communication, fueled rather than calmed market volatility on several occasions.

These failings are becoming increasingly consequential for the public. Inflation has remained too high for too long, robbing people of purchasing power and hitting the poor particularly hard. Last month’s bank collapses were deemed serious enough for the authorities to “break the glass” by triggering the “systemic risk exception”; but this response could now impose a larger burden on all depositors. These developments, including the threat of less credit availability, have increased the risk of the US falling into recession, fueling income insecurity in what would otherwise be considered a strong economy.