Mistakes the Fed Keeps Making

Every time the Federal Reserve has maintained easy monetary policy too long and then raised rates abruptly, the consequences have been jarring. This time is no different. Even when the economy managed to avoid recessions, it couldn’t avoid bumps on the road. Remember the stock-market crash of October 1987, the savings-and-loan crisis of the early 1980s and the bankruptcy of Orange County, Calif., during the Fed’s rate increases of 1994? Every episode is different, but every episode exposes the weak links.

This time the Fed’s excessively accommodative policy and forecasts that inflation would fall without the need to raise interest rates by much encouraged banks to buy bonds and maintain significant asset-liability mismatches. Silicon Valley Bank wasn’t alone. Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., recently estimated that banks faced $620 billion in paper losses at year-end 2022. The Fed’s misleading forecasts have contributed to the costs of reducing inflation and risk a banking crisis. A lapse in bank supervision has compounded the problem.