Behind the Banking Crisis, an Era of Easy Money’s End: QuickTake

An unparalleled era of easy money came to a screeching halt in 2022, as central banks shifted gears to subdue inflation: The US Federal Reserve raised its benchmark rate from near zero to 4% in a mere six months. That speed led to worries that something in the financial system would break, as the tightening of credit revealed previously hidden vulnerabilities. Those fears seemed to materialize in the failure of two US banks, while global giant Credit Suisse appeared to teeter on the brink of collapse or bailout. The market turmoil that followed raised questions of whether chastened banks would pull back on lending in a way that could tip economies into recession. It also left the Fed facing even greater difficulties in balancing its inflation fight against the damage aggressive monetary policy can cause.

Central banks opened spigots wide to keep the global financial crisis of 2008 from triggering a depression, using low interest rates and other measures to try to stimulate business activity. They kept rates low for years in the face of a notably anemic recovery, then opened the faucets again when the pandemic struck: The Fed cut interest rates back to near zero and didn’t raise them until March 2022.