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All eyes are on the Federal Reserve’s next move in this “wobbly” economic moment

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Jerome Powell adjusting his glasses

Chairman Jerome Powell and other policymakers at the central bank will reveal their interest rate decision Wednesday. The Fed is also taking steps to stabilize the condition of regional banks and protect depositors. Drew Angerer/Getty Images

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For a year now, the Federal Reserve’s main concern has been bringing inflation down, and eight interest rate hikes, thus far, have been its primary means. That goal has been muddied by turmoil in the financial sector that calls for the Fed to keep banks’ liquidity intact.

Nina Eichacker, assistant professor of economics at the University of Rhode Island, joined “Marketplace’s” Kai Ryssdal to talk about how the Fed might respond. An edited transcript of their conversation is below.

Kai Ryssdal: Before we get to the Fed and the events of the last, like, 10 days or so, give me your 30-second update on the state of this economy right now. What do you think?

Nina Eichacker: We are going through some big wobbles. But the Federal Reserve is doing everything it can in tandem with other big central banks, practically around the world, to reassure banks in their respective countries that they will get them through the problems at hand.

Ryssdal: So let me get you to that “problems at hand” thing. You saw the news over the weekend that the Fed and a lot of other central banks — the Fed is going to expand to the benefit of other centrals banks, rather — dollar swaps availability. That is to say, the Federal Reserve is going to make dollars available to basically any central bank that wants it. That kind of smacks like 2008. And I wonder if people hearing that are gonna go, “Oh, my goodness, are we there again?” We’re not there again, let’s just be clear about that.

Eichacker: I agree. I don’t think we are there yet. Those central banks may appear to be acting heavy-handed in this response, but what they seem to be demonstrating is an understanding that panics have escalated. And by transitioning to this huge response, they are doing what they can to bring things back under control.

Ryssdal: OK, so all of that said, let’s teleport ourselves to Wednesday and [Chair] Jay Powell stepping up to the microphones in the Federal Reserve building on Constitution Avenue and saying, “Good afternoon, it’s good to be here.” And then having to walk a very delicate line, depending on what the Fed decides to do, whether raising rates or pausing. Talk to me about the Fed’s communication challenge right now.

Eichacker: So the Fed, since the start of [2022], has been really in huge damage control mode about inflation. It has been raising rates over most of 2022 in order to curb borrowing and in order to curb spending. However, with all these banks in trouble, the Fed is simultaneously engaging in massive relief efforts by actively lending out billions of U.S. dollars to banks in order to keep them from collapsing. So these look like 180-degree different. What I suspect the Fed is thinking about is to what degree the current financial panics will do the job that rate hikes have been doing. Banks are likely to dial back from lending in this moment. And, in the process, that may decrease the need for the Fed to keep raising rates to the degree that it has.

Ryssdal: Let’s talk next steps in the banking situation that we have now. I talked to Daniel Tarullo last week, the former chair of the committee on supervision and regulation at the Fed, as you know, and he said, “Look, I think there’s more regulation coming. I think we may see broader insurance there for deposits above and beyond $250,000.” What do you think we’re gonna see?

Eichacker: I think it is a very bad look for bankers to lobby for deregulation and then fail, which is something that the head of SVB and Signature Bank had been a part of. I think that the Fed is coming under a lot of scrutiny for not drawing more attention to these underlying risks in the financial system overall. And I think that it really is not a good look when other parts of the Fed’s strategy for cooling inflation have apparent impacts for homeowners that are trying to buy a house or for workers who may be at risk of losing their job, but for banks that have opposed regulation to look as though they are getting a free pass in all of this.

Ryssdal: Let me get you back to where we started: the wobbles that you’ve seen. Do you suppose that this is a passing moment? And look, I understand this is a really tricky question, especially when there’s a microphone in your face. But do you suppose this is a passing moment or is it the precipice possibly of deeper problems in the larger economy, not just banking?

Eichacker: I think that what it speaks to is a broader moment of uncertainty. And this was always a possible outcome when the Fed started targeting rate hikes. I mean, the desired outcome of increasing rates is to make it harder for entities to borrow and to discourage banks from lending, but that can create funding problems for the financial institutions themselves. I suspect we will continue to see banks come into trouble. But I really hope and I maintain faith that these central banks know enough about the recent past, and even the farther past if we look back to 2008 and 2009, to see the costs of not engaging in large action when it’s called for.

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