The Fed isn’t finished

Last week, after hawkish testimony from Federal Reserve Chair Jerome Powell, markets penciled in a half-point increase in interest rates following the central bank’s next policy meeting. Last Friday, the run on Silicon Valley Bank and subsequent fears of a wider crisis changed many investors’ minds. Some bet that the Fed would forgo further rate hikes entirely this year.

The latest inflation figures suggest that would be a mistake. The need to keep pressing down on demand hasn’t gone away, and the SVB fiasco shouldn’t deflect the Fed from the goal Powell outlined: getting the inflation rate back down to its stated goal of 2 percent.

To be sure, if regulators had let the SVB emergency—followed by the collapse of Signature Bank and investors’ flight from some smaller institutions—trigger a system-wide financial meltdown, there’d be no need for higher rates. In that case, excess demand would’ve been the least of the Fed’s problems. As things stand, though, the risk of contagion has been dealt with, and the knock-on effects on the broader economy will likely be minimal.

Those calling for a pause in monetary tightening argue that the fright over SVB shouldn’t be separated from the economic outlook. They say that it points to the dangers in raising interest rates too abruptly, and that the scare is itself a leading indicator of subsiding demand—it shows that the tightening already applied is finally starting to work.

Neither objection is persuasive. Raising interest rates is indeed risky. But failing to get inflation under firmer control is even riskier.