VIDEO: Is the Federal Reserve to blame? Inflation, banking crises and interest rates

Over the past year, it has been difficult to talk about financial markets without mentioning the Federal Reserve. This has never been more true than the last three months, when a banking crisis has erupted, triggered by the collapse of Silicon Valley Bank (SVB) in March. 

This week on the Invezz podcast, Dr Craig Pirrong, professor of finance at the University of Houston,  joins the show to delve into this burgeoning banking crisis, as well as interest rates, the Federal Reserve, inflation, and what happens next for the US economy.

Is the Fed to blame for the current state of the banking sector? Where did inflation come from? These are two nuanced questions, and Pirrong discussed his thoughts on both during the episode. There has been much discussion about both the Fed’s role in facilitating this mess – not only with recent hikes, but with the groundwork laid in the years running up to it. 

Before we transitioned into this period of tight monetary policy, just over a year ago, we had endured a period of historically low interest rates. Coupled with aggressive fiscal policy as a once-in-a-generation pandemic struck globally, it put the economy in a very precarious position.

Up sprouted inflation, spiralling close to double digits. Today, it sits at 4.9%, a far cry from its peak, but also long way off the 2% target. Pirrong discussed his thoughts on the all-important metric going forward, and how all these occurrences knitted together to cause a perfectly imperfect storm with regard to the economy.  

And so, with inflation rising, the Fed was forced to act. Up went rates at a rapid pace, and Pirrong chatted about where he felt the Fed went wrong here, pointing to both the pace of the hikes but also debating whether the Fed was asleep at the wheel by waiting so long to hike. 

However, there is also the issue of risk management on the banks’ side. Were banks foolish to get caught on the wrong side of the duration imbalance? Should they have seen these hikes coming? 

Bouncing around the big topics facing the economy right now, Pirrong gives his insight on the big drivers right now: the Fed, interest rates, inflation, the banking crisis, and the issue of FDIC insurance, to name a few. His expertise in the area, and formidable background, is tangible and it made for an enjoyable and wide-ranging conversation which is now available on the main podcast platforms.  

Continue the conversation on Twitter with @InvezzPortal and @DanniiAshmore. See Dr Craig Pirrong’s profile here.

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