History of Banking Crises Holds a Warning for Jay Powell
Responding to bank failures in 1972 and 1984, the Federal Reserve pursued two very different paths, with very different consequences for inflation.
Somewhere, Volcker is watching.
Photographer: Bettmann via Getty Images
To brake? Or to break?
For central banks throughout history, there has been a recurrent tension between price stability and financial stability. Raising short-term interest rates acts as a brake on economic activity by increasing the cost of credit throughout the financial system. But raising rates can also break financial intermediaries such as banks. It’s close to impossible to apply brakes to the economy without breaking something — even if investors and policymakers never tire of fantasies about soft landings, immaculate deleveragings or Goldilocks scenarios.