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The Fed Must Not Flinch

The failures of Silicon Valley Bank and Signature Bank are significant market events. But, given an overheated labor market and 1970s-like inflation, if the Fed cannot see the whites of the eyes of a systemic banking crisis, then it must move aggressively on the inflation front.

WASHINGTON, DC – Financial-market turmoil has clouded the outlook for US monetary policy, with many economists, investors, and financial institutions expecting that the Federal Reserve will not increase its policy interest rate at its meeting this week. But while the failures of Silicon Valley Bank (SVB) and Signature Bank are significant market events, they should not knock the Fed off course. Policymakers should hike the benchmark federal funds rate by at least 25 basis points this week. With signs Monday that bank deposits had stabilized, a 50 bps increase would be even better.

Last month, the consumer price index registered 6% inflation relative to the same month in 2022. Stripping out volatile food and energy prices found 5.5% “core” inflation. Over the past three months, core CPI has increased at a 5.2% annual rate – the fastest pace since October 2022.

Nearly two years of decades-high inflation has inured the policy debate to these eye-popping numbers. Six percent CPI inflation is an emergency that needs to be addressed with aggressive action. It should take a lot more than temporary instability in the community banking sector for the Fed to deescalate its response.

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