Growth, Inflation & Policy
As of April 23, 2023
GDP & Inflation
- Over the quarter, inflation continued to tick lower. Despite the recent banking system instability and the collapse of two large banks in the U.S. in mid-March, the Federal Reserve has continued to hike rates.
- The most recent rate hike highlights the predicament that the Fed has put itself in—by waiting too long to address inflation, it must now decide whether to tame inflation by pushing the U.S. economy into a recession or risk a 1970s-type resurgence with potentially ruinous consequences for the consumer and markets in the longer term.
- The University of Michigan’s Consumer Survey shows a recent acceleration in inflation expectations. The longer the Fed takes to bring inflation under control and the more these higher inflation expectations become entrenched in the minds of consumers, the more damage could be done to markets..
The Fed Discount Window
- In response to the banking system instability and to reduce risk of further contagion, in mid-March the Federal Reserve eased access to its Discount Window by valuing the collateral received in exchange for liquidity at par instead of the usual practice of imposing a haircut.
- Banks have since made extensive use of the Discount Window, borrowing more than $152 billion from the Fed between March 11 and March 15.
- The last time banks made such extensive use of the Discount Window was during the Global Financial Crisis, when approximately $111 billion was borrowed at its peak.
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