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Bank failures make our central bank’s job more complicated. Here’s why.
The Fed’s task is now more complicated — the central bank has to balance the need for additional hikes in response to high inflation against the risk of a disorderly tightening of financial conditions triggered by bank failures.
For the Fed, the risk of overtightening is outweighed by the risk of relaxing policy prematurely. Markets have moved to price in a much less aggressive hiking cycle and then a rapid reversal to an easing cycle starting this summer.
Our view is that this is premature unless we see a rapid deterioration in risk sentiment.
