If US authorities can restore confidence in the banking system, the recent turmoil won’t do much damage to the economy.
The US Federal Reserve is facing increasing pressure to sacrifice its monetary policy goals for the sake of financial stability, on the grounds that its interest rate increases are to blame for the turmoil in the banking sector.Memories of the 2008 financial crisis loom large as one bank after another runs into distress. Investors and depositors take flight faster and with less provocation than ever before, magnifying the effect of shocks such as the demise of Silicon Valley Bank.
These differences matter, because they mean that if US authorities can restore confidence in the banking system, the recent turmoil won’t do much damage to the economy. Banks as a whole account for a small share of financial intermediation in the US, and the handful of troubled regional institutions represents only a few percent of total banking assets. There’s no reason for credit to tighten as much as it did in 2008.
, given the unsettled situation. As Fed officials have suggested, destination matters more than speed, and going more slowly gives them more time to assess the effects of previous actions. On the other hand, cutting rates when inflation is still high would be more alarming than calming.
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