Powell is so difficult: it is necessary not only to learn from Volcker to control inflation, but also to learn from Bernanke to save banks

Wallstreet News ·  03/24 17:59

It could end in a full-blown recession.

Throughout the history of the Fed, Paul Volcker is the "inflation killer", Ben Bernanke is the "crisis firefighter", and the current chairman Powell has to play both roles.

When Powell's Fed is gradually pushing through the process of tightening, raising interest rates to fight inflation, a nuclear bomb has fallen, and the banking crisis in Europe and the United States has shaken global markets, making Powell's task even more difficult.

On Friday, according to media reports, Anna Wong, chief US economist of Bloomberg, pointed outThe relationship between "fighting inflation" and "maintaining financial stability" is more strained than at any time in the Fed's history, reaching a 140-year high.Wong said:

The current banking crisis must worsen badly for tight credit to have a considerable impact on inflation. If this does not happen, the market will raise its forecast for the Fed to raise interest rates.

The banking crisis stirs up the process of raising interest rates

Bank of America Corporation's latest survey of global fund managers shows that the credit crunch has replaced stubborn inflation as a key risk.

Bank of America Corporation's unrealized losses exceeded $620 billion by the end of last year, according to the Federal Deposit Insurance Corporation (FDIC). Economists have calculated that if there is a large-scale deposit flight, hundreds of banks could face the same fate as Silicon Valley banks.The recent decline in the value of bank assets has significantly increased the vulnerability of Bank of America Corporation's system to uninsured depositors.

Powell pointed out at a previous press conference that the banking crisis would not be the reason for the Fed to ease the tightening process because of the difference between the supply of short-term liquidity and asset purchases or sales aimed at transferring long-term borrowing costs. Many experienced Fed watchers agree, but that has not stopped fund managers from seeing it as a sign of future easing.

The ideal situation is unlikely to be realized.

In the Goldilocks economy, credit conditions will be tight enough as banks reduce lending and shore up their balance sheets. This will help Powell cool the overheated economy and reduce the need to raise interest rates. Both the Fed's actions to control inflation and the tools to prevent financial collapse can work effectively alone.

It looks good, but the problem is that, in extreme cases, policies that control prices and support banks point in the opposite direction. To reduce inflation, central banks have raised interest rates and squeezed liquidity from the banking system. In response to the crisis, they will free up liquidity to support battered lenders and reduce the cost of credit.

It is possible that the situation will eventually turn into "a full-blown crisis that triggers a recession", forcing central banks to give up the fight against inflation and rush to prop up the shaky financial system.

Edit / phoebe

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