What is missing from the debates over monetary policy today is the understanding that the Fed was not established to control inflation. It was created to prevent financial crises by acting as a lender of last resort in times of distress. Indeed, that’s exactly what the Fed is doing now — opening up its lending facilities to banks in need. But rather than focus on maintaining financial stability, the Fed has become obsessed with controlling inflation, something it cannot really do without causing either a recession or a financial crisis (or both).
What the Fed needs to do is abandon misguided economic theories that have subverted its primary goal of financial stability to inflation targeting. Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability. The current experience is yet another stark example that unstable interest rates are inconsistent with financial stability. This approach is counterproductive and unnecessary since we have more effective tools for macroeconomic stabilization, such as fiscal policy..…
Simple and understandable explanation of what went wrong. The authors admit it not the whole story but it is the essence of it. Rate hikes, which are useless in controlling inflation anyway unless they create a crisis.
The Hill — Opinion ( 03/17/23)
The collapse of SVB shows why monetary policy is the wrong tool to fight inflation
The collapse of SVB shows why monetary policy is the wrong tool to fight inflation
Yeva Nersisyan, Associate Professor of Economics at Franklin and Marshall College, and L. Randall Wray, Professor of Economics and senior scholar at the Levy Economics Institute of Bard College — Opinion Contributors