COMMENT: Pressure is on the Federal Reserve

Less than two weeks ago, some financial experts were speculating that the Federal Reserve Board would raise its lending rate by as much as 50 basis points — one half of 1 percent — at its March meeting, which is set for Tuesday and Wednesday.

That thinking came as a result of recent statements Fed Chairman Jerome Powell made before Congress where he indicated that previous rate hikes were not reducing inflation at a satisfactory pace.

Other Federal Reserve Board members even hinted that the Fed lending rate, now at 4.75 percent, could rise has high at 5.5 percent by the end of the year.

Now, given the failure of Silicon Valley Bank last weekend, all bets are off. While some economists believe that the Fed will go ahead with another hike, although smaller, maybe 25 basis points instead of 50, others think the Board will stand pat.

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A few analysts even believe that the tightening mode may be over, that the failure of Silicon Valley Bank has sent a signal that the Fed is doing more harm than good by continuing to raise rates.

Without question, the Federal Reserve Board is at fault here, not so much for raising rates back up to where they belong, but for dramatically cutting them to nearly zero in the first place. It is much easier to lower rates than to raise them.

It is ironic that Silicon Valley Bank failed on almost the exact date that the government shut down the economy three years ago because of COVID. That was the beginning of the financial troubles we face today.

It is hard to believe that shutting down the country for three just months — March, April and June 2020 — could result in so much long-term damage. But it has, primarily because everyone overreacted. Stores were shuttered, factories closed and we were told to hole-up in our homes to prevent the spread of the virus.

Then the government began giving out free money in the form of checks and low interest rates. Those rates had never fully recovered from the Great Recession of 2008, but now the Fed took them even lower. Suddenly, you could get a mortgage at 2.75 percent interest and upgrade the furniture in it with those never-ending stimulus checks.

All this was unprecedented. Even in the early 1930s, during the height of the Great Depression, mortgage rates remained at about 5 percent. But in 2020, a generation that had never experienced hard times felt it could not survive without free money. So, rates went down and checks, funded by federal bonds, went out.

The stimulus checks were supposed to be used to stimulate the COVID economy. And it did. Americans went on a spending spree that continues to this day. With interest rates at almost prehistoric lows, they bought homes and cars and anything else their hearts desired.

Businesses quickly realized that a population that had been locked in their homes for months would pay any price for the wants they desired. As the wild spending continued, prices went up and continue to rise.

If there is no free lunch, there certainly is no free money. It must come from somewhere, and as college students are finding out, if it is borrowed, it must be paid back.

Now the Fed is calling in the bonds sold to finance the stimulus checks and trying desperately to slow the inflation caused by low interest rates. But as stated earlier, it is much easier to lower rates than to raise them. People get used to cheap money.

Silicon Valley Bank found itself caught between swiftly rising interest rates and dwindling liquidity. In a matter of a few days, one of the largest banks in the nation was history.

The Federal Deposit Insurance Corporation covers accounts of up to $250,000, and Washington has vowed to make good depositors’ (mostly businesses) larger accounts. Hopefully, the fallout will be limited.

But Silicon’s failure puts the Federal Reserve between a rock and a hard place. It wants to curb inflation but not at the cost of sending the nation into a deep recession.

The pressure will be on at Tuesday’s Fed meeting. Americans are already seeing their Stock Market retirement accounts fall, and now they are worried about the money they have in the bank.

As in 1930, they are starting to wonder if a tin can in the backyard or a sturdy mattress is the best place to put their savings.

And they are finding out that free money is not really free.

Donnie Johnston’s columns appear twice per week on the Opinion page. Reach him at