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Here we go again. The Federal Reserve will decide on Wednesday just how aggressively it wants to pursue its rate-hiking, inflation-fighting campaign, only this time it will do so against the backdrop of a roiling bank crisis.

Addressing one crisis may only exacerbate the other, and (surprise, surprise) pretty much all of Wall Street has an opinion on what Fed Chair Jerome Powell and his board should do.

Powell’s Sophie’s Choice

It’s less a question of what Powell will do than what will happen when he does it. The smart money is on yet another 25 basis point increase, an acknowledgment that inflation — as well as the high consumer spending and a strong labor market — remains persistent. A month ago, another small hike may have been met with optimistic predictions of a soft landing. But that crash-free fantasy has been harshed by the reality that many mid-tier, regional banks are at risk of becoming overleveraged if rates continue to increase, potentially sending them the way of Silicon Valley Bank.

The Fed is already at work mitigating the spread of SVB’s collapse, offering some banks one-year loans on more friendly terms than the current 4.75% interest rate, and sources told The Wall Street Journal that Fed officials could continue to utilize emergency lending tools if the banking sector continues to falter. But inflation is likely to persist whether or not banks are properly prepared for rate hikes. That leaves Powell fighting a war on two fronts, putting him in a position of potentially having to pick between his two mandates: maximum employment and price stability.

Suddenly everyone is turning to their personal crystal ball to see where the Fed falls:

• “I would advise them to go ahead with the 25,” Richard Clarida, Fed vice chair circa 2018 to 2022, told the WSJ. “If they pause, you can get into this ‘what do they know that we don’t know.'”
• Eric Rosengren, former Boston Fed president, offered a different perspective to the WSJ: “One 25-basis-point increase now will have a fairly modest effect on inflation, but it could have an amplified effect on financial conditions.”

Have Your Rate and Eat it Too: Some rate-hike doves have raised an alternative viewpoint: the prospect of becoming the next SVB may be scaring banks into self-consciously tightening their own lending policies — which is the intended effect of a rate hike anyways. “You would want to say, ‘This is doing some of our monetary policy job for us,'” former Fed Governor Jeremy Stein told the WSJ. “If you can communicate that well and effectively, the choice between 25 and 0 is less consequential than how you explain it.”