The collapse of Silicon Valley Bank, the second-biggest bank failure in U.S. history, has thrust the financial system into distress, pulling attention away from a separate problem: sky-high inflation.
The twin economic challenges pose a dilemma for the Federal Reserve because its strongest tool, the benchmark interest rate, is a key cause of the financial emergency but the primary solution for high prices.interest rates over the past year, bringing inflation down significantly from a summer peak, though it remains more than triple the Fed's target of 2%.
A continuation of the rate hikes risks further intensifying the banking crisis, putting additional financial institutions at risk of collapse. However, a pause on rate increases could undermine the Federal Reserve's fight against inflation, allowing high prices to persist and eat away at household budgets, economists said.
Still, the Fed could avoid facing a choice between the two objectives, since tighter lending practices taken up by private sector banks in response to the financial distress may cool the economy on its own accord, allowing the Fed to forego raising rates while still bringing down inflation, economists said."It does seem as though financial instability could take care of inflation anyway," Julia Pollak, chief economist at Zip Recruiter, told ABC News.
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