“ The world’s most powerful central bank has slipped in its analysis, forecasts, policymaking and communication. ”
Reacting to Silicon Valley Bank’s sudden collapse, André Esteves, a senior Brazilian banking executive, was quoted as saying that “SVB’s interest rate risk would’ve been obvious to any banking intern in Latin America.” To some, this remark will sound rather rich coming from a region that has had no shortage of banking-sector problems. Nonetheless, Esteves’s sentiment is revealing, because it reflects mounting concerns around the world about the U.S. Federal Reserve’s policymaking and its adverse spillover effects on other countries.
There are good reasons to be concerned. Just in the past three years, the Fed has mishandled its interest-rate hiking cycle, faced insider-trading allegations, stumbled in its supervision of banks, and, through inconsistent communication, fueled rather than calmed market volatility on several occasions. These failings are becoming increasingly consequential for the public. U.S. inflation has remained too high for too long, robbing people of purchasing power and hitting the poor particularly hard. Last month’s bank collapses were deemed serious enough for the authorities to “break the glass” by triggering the “systemic risk exception”; but this response could now impose a larger burden on all depositors. These developments, including the threat of less credit availability, have increased the risk of the U.S. falling into recession, fueling income insecurity in what would otherwise be considered a strong economy. The Fed’s problems should worry everyone. A loss of credibility directly affects its ability to maintain financial stability and guide markets in a manner consistent with its dual mandate of maintaining price stability and supporting maximum employment. I personally cannot recall a time when so many former Fed officials have been so critical of the institution’s economic projections, which in turn inform the design and implementation of its monetary policy.