For the Federal Reserve, credibility is everything. And its credibility is being tested by how it plans to manage the banking system as outlined in meetings yesterday and today. 

Last month, Fed Chair Powell confidently told Wall Street to prepare for a 25-basis point increase in short-term rates in March. But with inflation remaining hot, some speculators have been calling for a 50-basis point bump. 

To complicate matters further, 2022’s rapid rise in interest rates appears to be a stressor on the banking system. The Federal Deposit Insurance Corporation (FDIC), in recent days, took control of both Silicon Valley Bank (SVB) and Signature Bank (SB). And now some are suggesting that the Fed should pause its strategy to manage inflation with higher interest rates to help the banking system. 

In short, the Fed is at a bit of a credibility crossroads. Supervising and regulating the banking system as a means of protecting consumers is one of the Fed’s most important roles. That’s why the U.S. government has already approved plans to safeguard depositors and financial institutions affected by the closing of both SVB and SB. 

At the same time, Wall Street wants to believe the Fed is data-dependent, not data-reactive. The markets want to believe the Fed has a plan for inflation and is considering how higher short-term interest rates are affecting the nation’s banks. 

So, it’s best to prepare for more market volatility in the days ahead as Wall Street is sorting through several issues, and looking to the Fed to provide some reassuring guidance. 

Learn more at Brumbaugh Wealth Management.

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Kim Brumbaugh is the founder and CEO of Brumbaugh Wealth Management, an Exton-based firm that helps secure people’s financial futures by understanding their unique position and providing personalized solutions for their needs. She started her firm in 2004 with a clear vision to coach clients through complex financial situations and act as a catalyst to get things done. 

Office located at 415 Eagleview Boulevard, Suite 110, Exton, PA 19341. 

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