A sudden interest-rate spike highlights two contradictory Fed trends

The central bank faces a choice: corridor or floor?

Jerome Powell.
(Image credit: Illustrated | OLIVIER DOULIERY/AFP/Getty Images, jessicahyde/iStock)

American financial markets went for an interesting ride last week. A particular market that specializes in providing banks and firms with short-term cash was hit by an unexpected squeeze last Monday. Interest rates in that market briefly quadrupled to 10 percent by Tuesday morning. That jump bled into the Federal Reserve's target interest rate, driving it up to the very top of the range the Fed is currently targeting.

It was an exceedingly weird momentary panic that's had Fed-watchers talking since. And it highlights how two basic trends in Federal Reserve monetary policy have evolved since the 2008 crisis — and how they just ran headlong into one another.

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