The Fed’s latest rate increase was, in numerical terms, piddling. But as a measure of the central bank’s resolve, it was freighted with significance
Two decades later, Mr Bernanke’s doctrine is facing a stiff test in the reverse direction—as a framework for dealing with frazzled, not frothy, markets. On one flank the Fed is trying to douse the red-hot embers of a crisis that began with a run on Silicon Valley Bank . On the other officials face stubborn inflation, having failed to wrestle it under control in the past year.
In the end the Fed was undeterred. Having already lifted rates by nearly five percentage points over the past year—its steepest tightening in four decades—the latest increase of a quarter-point was, in numerical terms, piddling. But as a measure of the Fed’s resolve, it was freighted with significance: it showed that Mr Powell and his colleagues believe they can use monetary-policy tools, especially interest rates, to tackle inflation, even when tightening poses risks to financial stability.
For Fed watchers, though, such cross-cutting actions look less surprising. In several cases—after a big bank collapse in 1984, a stockmarket crash in 1987 and a hedge-fund blow-up in 1998—the Fed briefly stopped raising rates or modestly cut them but resumed tightening policy before long. Economists at Citigroup, a bank, concluded that these experiences, not 2008 or 2020, are more pertinent today.
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