Every Federal Reserve tightening cycle has created a financial crisis. The current deposit run on regional banks probably fits this cycle’s financial crisis definition. Legendary economist Ed Hyman points out that after each of the financial crises since 1984, the Fed either eased or paused to try to control the situation (see chart below). Fed Chairman Jay Powell has noted,”History shows that isolated banking problems, if left unaddressed, can undermine confidence in healthy banks and threaten the ability of the banking system as a whole”.

Nonetheless, on March 22, the Federal Reserve implemented an unprecedented rate hike despite many signs that the current crisis is not over, as well as history’s lesson that crises don’t end until the Fed at least pauses. The main reason for this hike seems to be that inflation is still not under control, as evidenced by the latest Consumer Price Index gain of 6% year over year. However, it should be noted that the CPI is backward-looking, and the forward path for inflation is clearly down, given that oil prices have plummeted, import prices for fuel and food are flat year over year, and the Core PCE slowed to 0.3% month over month (3.6% annualized)and service worker wages and benefits, a key contributor to inflation, slowed dramatically in the Philadelphia Fed’s latest survey. Commodity prices have also declined substantially.