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Opinion
Mohamed A. El-Erian

How Front-Loading Rate Hikes Risks Financial Instability

Inflation requires faster increases, which intensify the threat of large financial accidents that can have nasty economic spillovers.

Fed Chair Jerome Powell isn’t thinking about pivoting.

Fed Chair Jerome Powell isn’t thinking about pivoting.

Photographer: Al Drago/Bloomberg

Corrected

The heated debate about how central banks should respond to high and persistent inflation has focused primarily on how high interest rates should go and how long should they stay there. A third issue, that of front-loading the increases, is particularly relevant in this rate cycle. After all, central banks are seeking not just to lower inflation without unduly damaging growth and jobs; they also face the challenge of steering a fragile financial system in which a market malfunction can significantly damage economic well-being.

Consider the Federal Reserve. Having badly misdiagnosed inflation last year and fallen behind its price-stability mandate, the central bank significantly intensified its policy response over the last few months. The June rate increase of 75 basis points was the first of that size in 28 years, and the Fed has followed with two similar increases, a record, with a third one expected at its meeting next week.