April 16, 2022 / VOLUME NO. 205


The Fed’s Conundrum

If you’re over 60, you might remember the long lines at gasoline stations and a 30-year fixed rate home mortgage that topped 17% in the early 1980s. We’re not quite in that disastrous period now. Oil prices haven’t reached the peak they were in 2008, when West Texas Intermediate crude oil reached $130 per barrel. And inflation, which rose to 8.5% in March, doesn’t begin to match what Americans over the age of 60 might remember, when the consumer price index hit 14.4% in June of 1980. 

But bankers have reason to be concerned. The Federal Reserve does not have a great track record when it comes to inflation. Reacting to rising oil prices and higher unemployment, the Federal Reserve lurched from crisis to crisis in the 1970s, raising interest rates to tamp down inflation but then lowering them again. In 1979, Paul Volcker stepped in as chairman of the Federal Reserve, and eventually brought inflation under control, but not without steep costs. The Fed raised the fed funds rate drastically and acted to limit the money supply. The nation was catapulted into a brief recession in 1980 and another one in 1981. 

I’m worried about the impact of inflation and the Fed’s response, and apparently, so are bankers and bank directors. Seventy-one percent of respondents to Bank Director’s 2022 Risk Survey, which was conducted in January, said they had increased concerns about interest-rate risk. Economists also are worried, although not overwhelming so. About 28% expect a recession in the next 12 months, up from 18% in January and 13% a year ago, according to an April survey by The Wall Street Journal. 

Hedge fund manager Tom Brown shares my concerns. “The Fed now has to play catch-up on tightening so furiously that it’s hard to see how it will get inflation under control without also tipping the economy into a recession,” he writes in his weekly newsletter on all things banking. As Bank Director’s Vice President of Research Emily McCormick notes in the latest issue of Bank Director magazine, the Fed’s job is to pull away the punch bowl. The Fed purposely ramped up bond purchases during the pandemic to stimulate the economy and is now looking to cut back on that nearly $9 trillion portfolio. But with the Fed’s track record, it’s hard not to worry.

• Naomi Snyder, editor-in-chief of Bank Director


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