Fed should stay put and hold rates where they are

 The economy needs time to adjust to these seismic shifts in monetary conditions, particularly given that the Fed kept rates near zero for 14 years.

The Fed’s primary focus on raising short-term rates has resulted in “yield curve inversion”, a market aberration where short-term borrowing costs are actually higher than long-term rates. 

If this persists, it represents an existential threat for smaller banks with profits that depend on their ability to use short-term deposits to make longer-term loans at higher rates.

 In 2013, without Congressional authorisation, the Fed created an “overnight reverse repo facility” — the functional equivalent of a reserve account for non-bank intermediaries  

While ONRRP was meant to be limited and temporary, it has in fact ballooned into around a $2tn facility, contributing to financial instability by draining deposits from banks.

Sheila Bair FT 24 July 2023

https://www.ft.com/content/de63c1b2-a65f-479c-a916-2fee4c40fcd1

The writer is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow at the Center for Financial Stability