The Silver Bullet - No. 5

No Free Lunch for the Fed

Immaculate disinflation. To succeed in fighting inflation, at the same time keeping the economy from financial instability: this is the central banker’s dream.

No Free Lunch for the Fed

June 2023

This month, the Fed will talk hawkish and act dovish. In a two-step dance with markets, central bankers have been targeting inflation, while at the same time keeping an eye on market volatility.

“There is no trade-off between price and financial stability”, said ECB President Lagarde at her press conference in March.

History suggests the opposite. With interest rates climbing, several cracks have opened across the financial system over the past few quarters, including the LDI pension fund crisis in the UK, Silicon Valley Bank and Credit Suisse to name a few. The Fed’s reaction will be to pause and wait.

Yet, 500bp of hikes later, the economy and the job market remain solid, and inflation is still sticky and above target.

If hikes aren’t working, then what are central bankers not doing?