This week, the Federal Reserve raised interest rates by 1/4 percent for the first time in years. But did they do enough, and is the market expecting the committee to do more? That’s a question that won’t be answered for years, but I believe the Fed’s interest rate hikes need to be much more aggressive.
Inflation has been accelerating
Just two years ago, Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) decided to slash rates to zero and bring back their bond buying program to help keep interest rates down on the long end of the curve. This was done to ease pressures from the pandemic, and at the time, it was needed. However, the Fed essentially printed money. Companies and people spent it, which helped fuel inflation.
A year ago, Chair Powell had been saying price increases were transitory. Perhaps Chair Powell was hopeful the problem would just go away. It didn’t, and now we consumer are literally paying for it.
In addition to raising the interest rate, the FOMC removed the excess accommodation of bond purchases. It must go further to insure price stability or we’ll be facing much bigger problems. (As a reminder, the Fed’s two mandates from Congress are control inflation and support full employment, which is pretty close today).
The Fed has a delicate balancing act to get right: raise borrowing costs to stifle demand. This could throw the economy into a recession, but they can’t afford to go easy here.
Interest rate hikes need to be more aggressive
What steps can the Fed take to alleviate the inflation? Inflation sits at levels not seen since the late 1970’s. I recommend we go back to that era and copy the playbook that broke the back of inflation for more than 41 years. The playbook included an aggressive series of interest rate hikes for Fed Funds. Interest rates hit an astounding 22%, but that did the trick. Until then, the economy was off kilter and price stability was wildly out of control. The economy suffered through two short recessions, but inflation came down sharply and had been tame until now.
Bottom line: The Fed needs to continue on this rate hike campaign (maybe up to 3%) until they see inflation snuffed out or face consequences we could not even imagine. It shakes me to the core to think about how bad things will get if inflation continues to spin out of control.
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