Why Was the Fed the Last to Know?

My students can be forgiven for not understanding interest-rate risk. But not the central bank

Letter to The WSJ.

"Kudos for your editorial “The Fed Failed but Wants More Power” (May 1). I have taught an economics course on money and banking for over 40 years, and one of the counterintuitive insights I have always emphasized to my students is that rising interest rates aren’t good for banks. Banks borrow the money that they lend to others, and their assets are longer-term than their liabilities. That is precisely the problem at the heart of recent bank failures.

My students can be forgiven for not understanding that aspect of the banking business. But not the Federal Reserve. It is behind the higher interest rates, so this can’t have been a surprise. Why, then, were the Fed’s bank regulators not actively requiring banks to plan for what everyone else knew was going to happen to bank balance sheets as interest rates rose?

Prof. John A. Flanders

Central Methodist University

Fayette, Mo."