When the Federal Reserve board last met, at the end of January, its main concern was whether it needed to continue hiking interest rates aggressively in order to bring down inflation. When it met yesterday, it had a whole new pile of concerns, including, most importantly, whether further interest-rate hikes would destabilize more banks and aggravate the mini banking crisis we’ve been living through since the failure of Silicon Valley Bank on March 10. Those concerns help explain why, even with inflation still high, the Fed chose to raise rates only a quarter of a point.
The fact that six weeks ago almost no one was talking about banks’ balance sheets, let alone bank runs, and today everyone is makes it seem as though this crisis came out of nowhere. But its true origins go back almost exactly three years, to spring 2020. The banking system’s current woes are in a real sense a product of the pandemic.