Policymakers face two nightmares: stubborn inflation and market chaos

In his first speech as a governor of the Federal Reserve, Ben Bernanke offered a simple adage to explain a complex topic. The question was if central banks should use monetary policy to tame frothy markets—for example, raising interest rates in order to deflate property bubbles. His answer was that the Fed should “use the right tool for the job”. It ought to rely, he argued, on regulatory and lending powers for financial matters, saving interest rates for economic goals such as price stability.

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Two decades later, Mr Bernanke’s doctrine is facing a stiff test in the reverse direction—as a framework for dealing with frazzled, not frothy, markets. On one flank the Fed is trying to douse the red-hot embers of a crisis that began with a run on Silicon Valley Bank (svb). On the other officials face stubborn inflation, having failed to wrestle it under control in the…

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This article was written by and originally published on www.economist.com