America's Talking - ‘No Painless Option’: Fed Faces Tough Choice on Inflation Following Bank Collapses

Episode Date: March 18, 2023

The U.S. Federal Reserve may be less likely to use its key tool to combat inflation because of recent bank failures. The Fed has been aggressively hiking interest rates for months to help combat inflation. While inflation has slowed, it remains elevated. Given the recent bank collapses, hiking rates again may be too risky for the Fed. “The Federal Reserve is going to have to pick its poison – tolerate some inflation for a bit to see if its current series of rate hikes takes hold and pause or keep hiking and deal with the financial instability caused by their own policy decisions,” Jamie Cox, managing partner for Harris Financial Group in Virginia, said in a statement. --- Listen to Other ATN Productions: America's Talking: An interview podcast hosted by Austin Berg. Guests include professors, journalists, artists, business and nonprofit leaders, authors, and more. Everyday Economics: Join economist Dr. Orphe Divounguy and Chris Krug as they discuss global markets, inflation, and everything else that will help you understand the economic world around you. Future of Freedom: Future of Freedom is a bi-weekly podcast highlighting the work of the non-profits which are shaping the future of the freedom movement. Listeners will hear civil, intellectual conversations about why the organizations exist, what their mission is, and how they work to achieve it. Hosted by Scot Bertram. Support this podcast: https://podcasters.spotify.com/pod/show/america-in-focus/support Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to American Focus. I'm Dan McAulib, executive editor of the Center Square Newswire Service. Joining me today is Casey Harper, the Center Square's Washington, D.C. Bureau Chief. Let's get into it, Casey. Over the past week, U.S. taxpayers, the federal government, investors in certain banks have been paying close attention to these recent bank failures. The federal government is going to bail out folks who have money in these banks that recently had failed. But coinciding with that is how that's going to impact the Fed's attempt to battle inflation. The Fed, of course, over the past year has been raising interest rates and there's concerns that those two might collide and impact inflation going forward. You've written about this a couple of times this week.

Tell us about it. Yeah, that's right. I mean, this is a really interesting issue. It's really troubling. And I like writing about it because it's honestly very confusing. I mean, who really understands how bailing out of bank works, especially when the White House is telling you, no, we're not really doing it like, you know, the bad way. We're just trying to help out people. And I mean, when it's an issue is this complicated, it's hard to really

question the narrative that the party in charge tells you. So I wanted to dig into that a little bit and also see how this impacts, you know, inflation for the next six months to a year down the road. And it turns out it does have a big impact. So the first side of this is Biden in his speech, he emphasized multiple times that taxpayers are not going to be on the hook for these bailouts. He said, I'll read this quote. This is an important point. No losses will be borne by the taxpayer. Let me repeat that. No losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the deposit insurance fund. So you kind of really clearly, I mean, he repeated it multiple times. You get the thing they're afraid of is, you know,

the in very recent memory, the 2008 financial crisis bank bailouts, which were political catastrophe, right, the bonuses. I mean, that was a really big story. People were really upset about all the billions of dollars of these banks got. And taxpayer money. Right. And they caused this giant recession and then they got all this money and really nobody paid any consequences for it. It was really unpopular. So I think Biden's trying to avoid that now, but is it true? So I talked to one expert E.J. Anthony, he's an economist at the Heritage Foundation. And he pointed out that that fund they're talking about doesn't have near enough liquidity to actually cover just the people who have their money in the bank, not let alone like investors.

And so he's saying like that is that is why they had to announce emergency lending fund to meet the demand for the liquidity. Right. So if that fund was enough, why is there another fund, which is a good point. And he just said, this is a really interesting quote. He said, there's no way around the reality that taxpayers are on the hook here. So he's essentially saying that taxpayers are on the hook. Yeah, it might not be as directly as you might think, but he kind of explains it here. So he says, when the FDIC runs out of cash, it goes to the Treasury for more, which is what we saw in the last financial crisis. And there's three ways to fund that. The FDIC can increase its insurance premiums charge to banks. But if they do that, that's just going to get

passed on to consumers, right? So it's kind of an indirect tax. Okay. So second way, is for the Treasury just to give the money, which, of course, the taxpayer is directly paying if they just hand the money over. And the last is the Federal Reserve can just print more money. I think everyone knows at this point, printing more money directly causes inflation, and that's a hidden tax on people. So, you know, the White House can say it's not a tax, and technically it's not. But if they print a bunch of money, then we're going to see much more inflation, which means when people go to the grocery store, all their food's going to be more expensive, which maybe technically isn't a tax. And consumers have been feeling that over the past

year and a half. Of course, the Fed printing more money helped drive the 40-year high inflation that we saw last year. Now, inflation has slowed somewhat, but prices are still significantly higher than they were just two years ago. So what you're saying is it's possible, depending on what the Fed does with interest rates, is inflation could continue to increase. Right. And I just want to point at this point, because both parties have really done this, but they have these giant bills and they emphasize, like Biden did, that no one making less than $400,000 is going to pay for this. So don't worry about it. If you're making less than $400,000, you're not going to pay. Or as he said recently, the taxpayer will not bear the, you know, the cost will not be borne by the taxpayer.

But I think everyone knows in the last few years because of how high inflation went directly, in large part, not entirely, but in large part because of these giant federal COVID relief bills, people making less than $400,000 definitely did bear the cost of it one way or another. So just because they don't tax you, if they do print all the money to pay for it, you're still getting up paying for it in the long run. And so I think this is something we've tried to highlight at the center square.com that is the taxpayer perspective, this is like a loophole. They can print the money and say they're not taxing anyone, but ultimately regular people

are going to pay the costs. And as you alluded to, this does have a big impact on the Federal Reserve, right? Because the Federal Reserve has a big decision to make later this month. They have to decide if they're going to raise interest rates. Now, of course, as we've said, the Federal Reserve raising interest rates is, you know, they see that as one of their big tools to fight inflation. They've been aggressively raising rates. And inflation has begun to level off in recent months. But now that these banks have collapsed, they may not be able to raise those rates anymore.

You know, there's debate over this. You ask 10 different people, you'll get different answers, different economies. But raising these rates is hard on the economies. It's hard on the economy. It can be hard on banks and definitely hard on the markets. And so if they do raise it again, they are going to be taking a big, risk with these banks and with the markets, which are a lot more sensitive right now. But if they stop raising it by the Fed's own logic, inflation will go up. So they have this really difficult

choice. And as one expert put it, and I put in the headline, it's no painless option. So these bank collapses have really had a big impact. And I think it's going to have impact for several months to come. One way or another, American taxpayers, American consumers are going to get hit by this. You said the Fed meets later this month. I think it's March 22nd. So we'll find out then if they're going to raise interest rates again. If it's going to be another big increase, they raise interest rates seven times in 2022 alone after going years of stagnant interest rates. We'll see then. We'll look forward to your reporting, which you can read at thecentresquare.com. Casey, that's all the time we have this week for our listeners. Please subscribe and thank you for listening.