Powell's playbook

Fed is striving to maintain a fine balance

The Federal Open Market Committee (FOMC) of the US Federal Reserve, led by Chair Jerome Powell, made the right decision to increase the target range for the federal funds rate by 25 basis points on Wednesday. The rate-setting body was under significant pressure to pause, given the recent developments in the US banking system, which was partly the making of the central bank. The Fed, for quite some time, was of the view that inflationary pressures were transitory in nature and inflation would normalise with the normalisation of the economy after the pandemic-induced disruption. The delay in the policy response to inflation pushed the Fed to increase the policy rate at a faster pace. A sharp increase in interest rates, expectedly, resulted in accidents in the financial system, such as large losses for banks that had overwhelmingly invested in government bonds and mortgage-backed securities. The losses were too large for Silicon Valley Bank, for instance, to absorb.

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