A report in the Wall Street Journal stressed the need to change the economic policy system in the United States in order to strengthen the economy and restore the confidence of the American people.

This comes as market participants believe that banking pressure will prevent the Federal Reserve from raising interest rates by a large amount, or perhaps not at all at its meeting this week, Reuters reported.

Sentiment looks fragile as investors battle pressure from banks that has worsened from weakness in regional U.S. banks to a global bank default in a matter of days.

History will record in detail the grave mistakes policymakers have made in recent years in setting economic policy, and the crucial lesson that should not be erased from collective memory is that nothing is more expensive than free money (zero-interest policy).

Kevin Warsh said the costs of the U.S. Federal Reserve's zero-interest rate policy are doubling, at a time when unusually loose financial conditions have boosted complacency among policymakers, before a recent surge in inflation has soared the cost of living for citizens and undermined good business planning.

According to the report, the latest consequences of reversing previous monetary policy (from zero interest rate to monetary tightening) have exposed the financial system's shortcomings that have long lain, at a time when credit is expected to contract and the economy to decline.


The report considered that the Fed's zero interest policy was among the most important economic policy mistakes made by policymakers in nearly half a century, before the US Federal Reserve admitted its mistakes - late - and began raising interest rates to rein in inflation, which reached record levels.

The cost of stemming the rising wave of inflation is increasing over time, while the US central bank would have been wise to raise interest rates from zero early in the economic cycle, when the economy and financial system were decidedly stronger. The country was in a much better position to deal with a rate increase in 2021 than it is today.

What needs to be done?

It will be difficult for the Federal Reserve to prove that a tighter monetary policy is needed to reduce inflation at the next meeting, arguing that a more flexible fiscal policy is necessary to ease pressure on the banking sector.

He pointed out that in order for Washington to be able to overcome this difficult period, he:

  • The US central bank, the Treasury Department, and the Federal Deposit Insurance Corporation must agree on their assessment of the magnitude of this crisis.
  • The Fed needs to break with traditional policies to break inflation and stop making forecasts for the trajectory of interest rates, the American people do not need weekly progress reports, they need stable rates.
  • Banking regulations require immediate and rigorous scrutiny, and the Federal Reserve and the Treasury Department should lead a fundamental review not only of their policy shortcomings, but of the entire post-Dodd-Frank system (a 2010 law to regulate financial markets, protect consumers, and avert a financial crisis like the one of 2008).


The Fed needs to adjust its policies in a rapidly changing environment, arguing that the end of free money will significantly damage bank liquidity.

Markets are in turmoil on concerns about the future of the global banking sector, following the collapse of Silicon Valley Bank (SVB) and Signature Bank, and coinciding with UBS's acquisition of struggling rival Credit Suisse in a bid to stabilize these markets.

US Federal Reserve Meeting

CME's FeedWatch service indicates that markets are 25% expecting the Federal Reserve to hold its stance when announcing its monetary policy decision on Wednesday, while 75% is expected to raise it 25 basis points.

Lloyd Blankfein, a former Goldman Sachs CEO, said the U.S. central bank could halt a rate hike this week as a banking crisis would lead to tighter lending standards in the economy.

Blunkvein was quoted by Bloomberg news agency on Sunday as saying that increased scrutiny in the wake of the collapse of Silicon Valley and Signature Bank would result in banks offering less credit on deposits.

For this reason, he noted, the market expects a greater than 70% chance that the Federal Reserve will raise interest rates by 25 basis points at its meeting scheduled for this week.

"Personally, I expect that stopping (rate hikes) would be acceptable, this attitude would be similar to a rate hike in some respects," Blankvein said.