- Higher interest rates lead to tighter financial conditions that can cause economic slowdown and lower inflation.
- The recent financial instability poses a dilemma for the Fed, whether to focus on high inflation or financial stability.
- The case for a pause in interest rate hike rests on two arguments: higher rates are at the root of the financial chaos and instability is a drag on the economy.
- Proponents of pressing ahead with a rate rise see a quarter-point rise as a better option to quell inflation and demonstrate the Fed's ability to manage financial stability.
- The decision of the Fed at the regular monetary-policy meeting on March 22nd is uncertain with probabilities of roughly 60% to a quarter-point increase and 40% to the Fed staying put.
The Federal Reserve must choose between inflation and market chaos
The Federal Reserve is in a dilemma whether to focus on inflation or financial stability amidst financial instability caused by higher interest rates. The decision on interest rate hike on March 22nd is uncertain.