Is the Fed playing with a full deck? It doesn't look like it

On May 3, the U.S. Federal Reserve approved new rate hikes after a unanimous decision that saw its benchmark federal-funds rate go up by a cumulative 5 percentage points from near zero in March 2022, the most rapid series of increases since the 1980s. The Fed signaled that it might be done raising interest rates for now as it tries to clear up the crippling inflation chewing away at real wages.

According to the Fed, things should have been good. And the Fed, as it always does, uses rate hikes to tame inflation by slowing down the economy through tighter financial conditions and higher borrowing costs, lower stock prices and a strong dollar. But then again, that same week, San Francisco-based First Republic bank collapsed and was forced by U.S. regulators to sell the bulk of its operations to JP Morgan. This was the second-largest banking failure in U.S. history.

This is also on the backdrop of the failures of two other banks, Silicon Valley Bank and Signature Bank, which at the time fueled speculation of a bank-funding crisis. While the Fed concluded that such stress calmed in late March ahead of a then-decision to increase rates, the failure now of First Republic makes this decision look futile.

This leads to some natural questions. Namely, is the Fed actually working on the best data to drive monetary policy? And are they implementing the proper measures if they are?

Twitter owner and Tesla CEO Elon Musk suggested on April 27, "The data with which the Federal Reserve is making decisions has too much latency," meaning the bank isn't using up-to-date data when making decisions. With recent events, one can't help but feel this is the case. But then again, Fed Chair Jerome Powell said at a press conference on May 3 that the Fed would start switching to credit tightening and monetary policy geared toward lenders – but, also, that this is a challenge.