World’s Fed Up US – central bank is caught napping, again

Source: The post is based on the article “World’s Fed Up US – central bank is caught napping, again” published in The Times of India on 18th March 2023.

Syllabus: GS – 3: Effects of liberalization on the economy.

Relevance: About US Fed policy and bank failures.

News: Recently the focus of financial markets has shifted from central banks increasing interest rates to commercial banks collapsing. Three US banks have collapsed and a fourth has received an injection of $30 billion from a consortium of banks. In Europe, Credit Suisse had to borrow $54 billion from the Swiss central bank.

About the US Fed policy post-2008

Following the 2008 global financial crisis, the US Fed unleashed waves of liquidity through a process known as quantitative easing (QE) to deal with the crisis of its own financial intermediaries. Fed’s quantitative easing (QE) had spillover effects on emerging markets like India. For example, the ‘taper tantrum’ of 2013 caused outflow of capital and Forex depletion.

Post-Covid, US Fed unleashed a loose monetary policy, then reversed course. The Fed embarked on a most aggressive policy of interest rate hikes. This led to predictable financial instability.

How US Fed policy has led to bank failures at present?

The Fed’s supervisory regime didn’t have a plan for banks likely to struggle in the wake of a fast-paced monetary tightening. So, that financial instability has spilt over to both the real economy and other countries.

To avoid such failures in future, the US Fed needs to get its supervisory act together.