Yesterday, the Federal Reserve Bank raised interest rates for the ninth time sending markets spinning and consumers holding their wallets tighter.

The central bank pressed ahead with a quarter-point increase to the fed funds rate–the rate at which banks loan each other money but which feeds through to many other forms of consumer debt such as mortgages, auto loans, and credit cards. The fed funds rate target range is now 4.75% – 5%.

Perhaps the biggest news from the Fed’s two-day meeting was that it may–i.e. will–wind down rate increases. The next rate increase could be the final one for the year.

The Fed is balancing its dual mandate of ensuring full employment and low inflation (about 2%) with economic consequences that could trigger hardships for American households. The reality is that despite interest-rate hikes freezing up the housing market, inflation is still three times as high as the Fed’s target rate and the unemployment rate is ticking upward. 

Add to that the recent bank panic following the failures of two banks. The Fed is walking a tightrope over a very high cliff while juggling multiple fragile plates. 

In a post-meeting press conference, Federal Reserve Chairman Jerome Powell noted:

The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.

The Fed projected that inflation would fall rapidly this year, but so far it’s still not below 6%.

Interestingly, Powell views fighting inflation and bank failures as two separate problems. Furthermore, he doesn’t think that the rate hikes are to blame for SVB’s failures:

So he plans to keep employing rate increases and shrinking the Fed balance sheet to fight inflation on one hand while supervising banks and staging targeted interventions to stave off bank panics on the other.

The Wall Street Journal editorial board says this is the right bet, but even they aren’t optimistic about the outcomes:

For now, Mr. Powell is hoping he can both calm markets and break inflation. It’s a difficult act, but then the monetary mania followed by inflation and financial panic are problems of the central bank’s creation. That’s why it now has to thread this needle.

The big picture is that our banking system is in a tenuous position and so is our economy. Raising interest rates to drag inflation back down from the stratosphere has led to the intended consequences of slowing economic activity in the housing market and the unintended consequences of destabilizing some banks. 

The recent failures of Silicon Valley Bank as well as prolonged inflation demonstrate the unintended consequences of ill-advised government action.

Irresponsible practices by banks like SVB and failures of oversight in the banking industry led to bank failure and fears that this problem may be widespread among many other financial institutions. Thanks to online banking, bank runs can take minutes instead of hours. 

Meanwhile, inflation is still stubbornly high and credit cards, mortgages, and auto loan bills are rising. Bank customers also face steeper fees. 

None of this happened magically; Washington is behind it all. Massive, excessive spending that gave away trillions of dollars in cash paired with loose monetary policies by the Fed such as printing money and keeping interest rates too low, led to the economic pain that has roiled the economy over the past two years. 

Previously, I suggested that raising interest rates was the prescribed medicine to cure Washington’s binge spending in 2021. Now, it’s time to wind down the medicine and allow the economy to recover on its own. 

Unfortunately, while the end of rising interest rates may be in sight, it’s hard to believe that the financial hardship on households will ease any time soon.