The Federal Reserve's Dilemma: Balancing Interest Rates and Banking Stability

The Federal Reserve is expected to raise interest rates by 0.25% at its policy meeting on Wednesday, bringing the benchmark interest rate range to 4.75%-5%, the highest since October 2007. The Fed is facing a difficult balancing act between a banking crisis and inflation that remains above target. The central bank's dual mandate of full employment and stable prices has an unofficial third arm of financial stability, which has been put under stress during this month's banking crisis. The Fed has said it would use its regulatory tools to deal with financial instability, and the central bank created an emergency lending facility to offer funding to banks to ensure banks could meet all depositor withdrawals.