As the saying in Game of Thrones goes, “winter is coming.” Well, in this case, “the end of easy money is coming” might be more accurate, though the sentiment conveyed by each is similar.
You see, as inflation stays high, not “transitory.” as Fed Chair Jerome Powell initially said it would be, the Fed is having to adjust its easy-money policies in an attempt to tamp down on the rapidly rising inflation that’s hitting every American in the pocketbook.
As a result, the Fed is hinting that the first rate hike in three years could come this March. The Federal Reserve hinted at that in a statement released after its Wednesday meeting, saying “With inflation well above 2 percent and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
Powell himself said “We are going to need to be, as I’ve mentioned, nimble about this. The economy is quite different this time,” probably in an attempt to reassure markets that the Fed won’t do anything that doesn’t appear necessary given the current situation and will respond to inflation as quickly as it’s able. The “nimble” comment might also mean that previously discussed rate-hike schedules cold be out the window.
Additionally, the Fed announced that it would slow its bond-buying program to $30 billion in February and could stop the program entirely in March.
Part of the problem for the Fed is that the economy seems split. On one hand, unemployment is down to a relatively low 3.9% (though that doesn’t take workforce participation into account, which is still a dismal number), but inflation is at a higher rate than it has been in years, ~7% as of December. So, part of the economy (and half the Fed’s dual mandate of keeping inflation and unemployment low) is in a good spot, but the other piece is the worst it’s been since the 80s.
Reflecting that split, Powell said “As we work our way through this, meeting by meeting, we are aware that this a very different expansion…Those differences are likely to be reflected in the policy that we implement,”
That’s a problem because the last time the Fed cracked down inflation, when Volcker was in charge under Carter and Reagan, it raised rates tremendously, leading to double-digit interest rates, which shocked the economy and led to unemployment but also broke the back of inflation.
Such a strategy could work again, if inflation doesn’t go away as the supply chain crisis eases, but it’s unclear if Powell or the government have the fortitude to essentially push the economy into a recession to do away with inflation, or if the cynical and already suffering American people would trust the government enough to let it embark on such a path.
In fact, Powell himself still seems focused on expansion rather than an inflation-breaking recession, saying “What we need here is another long expansion…that’s going to require price stability. That’s going to require the Fed to tighten interest rate policy and do our part in getting inflation back down to our 2% goal.”
A noble goal, though we’ll see if it’s possible. If not, the Fed might be forced to make a short-term choice between low inflation or low unemployment, and making the right choice will require more backbone than D.C. has seen in quite a while.
This story syndicated with permission from Will – Trending Politics
Notice: This article may contain commentary that reflects the author's opinion.
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