The Fed is fighting inflation with strong action, and Chair Jerome Powell has made it clear that they intend to stomp it out with bold interest rate hikes. This is a good thing – even if it doesn’t feel that way right now. Over the long run, our economy and the nation will be better off because of it.
They’re fixing the problem they created
Let’s face it, the Fed created this inflation problem by adding enormous amounts of liquidity into the system. It was akin to pouring bottles of vodka into the punch at the party. As long as the drinks were flowing, it was a fun time. Then the party got out of control, and the Fed turned out the lights.
As we all know, the Fed raised rates again last week, bringing the Fed funds rate up to 3%. And, they said there will be more hikes this year – and probably next year, too.
Traders and investors (among many others) are displeased with the Fed’s approach of strong rate hikes. Inflation needs to be stopped, and the only tool to fight it is higher interest rates. Yes, higher rates will make it more challenging for companies to post positive earnings. And yes, higher rates in fixed income will become a more formidable opponent against other risk assets (like equities markets).
The Fed is fighting inflation for our long-term good
By raising interest rates, the Fed can restore price stability and preserve the strength of the US dollar. Without price stability, our currency could become worthless. Too much money chasing too few goods can turn into a vicious downward cycle that is very slow to reverse.
I don’t believe the Fed is done raising interest rates – not by a long shot. Fighting 8% inflation with 4% interest rates is like bringing a knife to a gunfight. I do believe the Fed is on the right path, even if takes time to realize the benefits. Higher rates coupled with a sharp reduction of bonds on their balance sheet may finally lead to a normal economy. We just need the upset traders and investors to step away from the spiked punchbowl.