For the second time this year, the Federal Reserve is gearing up to raise interest rates right after a bank failure
In this instance, the Fed’s decision this Wednesday will come just two days following the collapse of First Republic Bank, the second-biggest bank failure in US history. Like Silicon Valley Bank and Signature Bank, First Republic’s failure was precipitated by the central bank’s year-long rate hiking campaign. As rates went higher, investments the banks made — particularly in long-term bonds — devalued, leaving lenders sitting on billions of dollars in unrealized losses.
To do that, it has to intentionally slow parts of the economy by making it more expensive for banks, and thereby consumers, to borrow money. But it’s a delicate balancing act between lowering inflation and causing a recession. In the 1970s and early 1980s, the Fed flip-flopped between raising interest rates to get inflation under control and lowering rates to spur economic activity. This form of monetary policy, often referred to by economists as “stop-and-go,” was disastrous for the economy.
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