Priority test: Can officials fight inflation and buoy banks?
As banking turmoil ripples around the world, government officials in many nations are suddenly confronting a two-pronged problem: how to fight inflation with one hand while bolstering financial system stability with the other.
These tasks are hard enough on their own. Added difficulty stems from the fact that typical solutions for them can work at cross-purposes. Raising interest rates to fight inflation can slam banks in some circumstances. Keeping rates low may calm financial institutions but fuel the fire of rising prices.
That’s left regulators from Frankfurt to Washington facing a clash of values. Is one of these problems worse than another? Must they be fought separately? Can they be addressed together?
To this point one thing seems clear: Central banks are reluctant to roll back anti-inflation measures,
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