After SVB failed, the Fed came to the rescue by guaranteeing all the deposits in the bank, calling it anything but what it is, a bailout. In the process of this bailout and increased lending to the other banks under pressure, they injected 2.3 trillion dollars into the economy. This increase in the money supply is very likely to increase inflation, but the Fed also needs to ensure the health of the banking system, they are facing tough decisions.
The Fed has been campaigning against inflation for over a year, and this put many banks under pressure and they are still under pressure now. Even though many expected them to pause rake hikes, they increased the rates by 25 percentage points this week, and they probably will keep going.
The bailouts and more probable actions to keep the health of the banking sector are likely to put upward pressure on inflation. As a result of this, the peak Federal funds rate is expected to be higher than previously expected. I think the Fed was right to keep raising rates because otherwise, the pause in the interest rates combined with the injection would make fighting inflation much harder. So, I think the rate expectations and bailouts will probably balance each other out.
But the possibility of a recession is greater now, and a soft landing seems less likely than ever.
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