News Release

“Blame the Fed”


Wray is senior scholar at the Levy Economics Institute and his latest book is Money for Beginners; Nersisyan is associate professor of economics at Franklin and Marshall College. They just wrote the yet-to-be-published piece “Blame the Fed” which states: “If the Fed should go crazy and hike rates quickly, the market value of bank assets will fall. But the Fed has kept rates low for a generation — and seems to have learned its lesson from the last three significant rate hikes: Volcker in the early 1980s, Greenspan in 1987, and Bernanke in the early 2000s: rate hikes kill financial markets. Surely the Fed would not be so stupid as to quickly raise rates? Of course not. The Fed had learned its lesson the hard way. Why would you want to create another financial crisis?

“Enter [Federal Reserve Board Chair Jerome] Powell and the pandemic disruptions to global supply chains. After some — laudable — patience as pandemic-induced inflation rose, Powell decided to raise rates to foam the runway for a soft landing. The truth is that the Fed has never engineered a soft landing. The reason is simple: higher rates reduce inflation only by creating a financial crisis that crashes the economy. After two decades of near zero interest rates, the Fed hiked rates extremely quickly — by 400 basis points (4 percentage points). All balance sheets that had been built during the period of low rates immediately became toxic. Short-sellers were watching. They sent out the warning to depositors: SVB [Silicon Valley Bank] is in trouble, withdraw all your deposits now!”