From the Editorial Board: To tame inflation and slow the hot labor market, the Fed needs to keep interest rates high for an extended period. But it will need to walk a tightrope to avoid putting an already fragile economy into a 2008-style tailspin.
Traders work on the floor of the New York Stock Exchange during afternoon trading on Oct. 13, 2022, in New York City., has won a Nobel Prize for explaining the causes of bank runs and other financial crises. Their research sheds light on the economic effects of fear.Global financial markets are facing their most treacherous period since the Great Recession of 2007-08. Another recession appears to be brewing, as central banks and policymakers grapple with persistent inflation.
The result was easy money. As intended, the cash infusions stimulated economic activity, prompting investment and lending that would not have otherwise occurred. Complaints were few while the U.S. economy expanded, interest rates were kept low and credit limits went higher. The stock market soared relative to the value of goods and services. Inflation was under control, as had been the case for decades.
Today, given inflation, the Fed has little choice but to reduce its balance sheet while also raising rates — a double-whammy that marks an end to the easy money that greased the economy for all those years. Banks are starting to respond by increasing reserves and reducing credit lines. Their tight-fistedness could pull the rug out from bank clients who’ve been assuming they could borrow anytime they want.In the run-up to the Great Recession, the risks were difficult to track and often disguised.
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