The policy compromises needed to resolve the SVB implosion

Financial Times/ Mohamed El-Erian/3-12-2023

raphic image of dominoes falling into 2023
“In a narrow sense, it demonstrates that even seemingly small banks can pose systemic risks. In a broader sense, it illustrates the inherent trilemma of the ongoing monetary policy regime change. Namely, the challenge for the Federal Reserve to simultaneously deliver on both its 2 percent inflation target and the employment part of its dual mandate while ensuring financial system stability.”

USAGOLD note: El Erian is among the first to weigh in on the Fed’s options now that something has actually broken. All the concerns registered here and elsewhere about the Fed’s policy conundrum are coming to a head. Nothing has changed. If the Fed goes neutral on rates, or heaven forbid, raises them, more SVBs are likely to surface. The return of quantitative easing is a distinct possibility. If it doesn’t tighten monetary policy (as originally planned), inflation will likely settle in for the long run.

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