June 17, 2022

Federal Reserve Acts

The Federal Reserve intensified its fight against high inflation on Wednesday, raising its key interest rate by three-quarters of a point — the largest bump since 1994 — and signaling more rate hikes ahead as it tries to cool off the U.S. economy without causing a recession.” AP News

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From the Left

The left is hopeful that inflation will soon slow, and cautions against increasing interest rates too quickly.

“The big question now is whether the Fed can raise rates at a more rapid pace than it previously anticipated, and bring inflation down, without knocking the economy into an outright recession. According to a new survey conducted by the Financial Times and the University of Chicago, which was published on Sunday, more than two-thirds of academic economists think that Powell won’t pull it off: they are predicting that a recession will start next year…

“On the upside, the forecasting record of academic economists is no better than that of the Fed, and Powell insists that all isn’t lost. Asked about a new report that indicated retail sales slipped back a bit last month, he said that over-all spending remained strong and there was no sign yet of a broader slowdown in the economy… In retrospect, the Fed made an error by not starting to raise rates sooner, although, given that inflation is a global problem—it’s running ​​at 8.1 per cent in the eurozone and 7.8 per cent in the United Kingdom—it’s not clear how much of a difference a quicker policy reversal in the U.S. would have made.”

John Cassidy, New Yorker

“The Fed is a powerful institution, an independent organ of the government that has a nearly unchecked power to create and destroy jobs and credit… [But] its sphere of influence does not encompass the entire universe. In his press conference Wednesday, Powell noted the Fed’s limitations in solving all the country’s financial problems. The war in Ukraine is inflating oil prices, and COVID policies in China are jamming up supply chains, just to name two large geopolitical problems that Powell has approximately zero influence on.”

Kevin T. Dugan, New York Magazine

Some argue, “there are several good reasons to think the economy is going to slow down without any extra help: (1) the Fed is already raising interest rates and slowing asset purchases, (2) the Biden stimulus will fade out in the second half of the year, (3) the housing market is likely to pop thanks to mortgage rates above 5%, (4) personal savings have dropped back to pre-pandemic levels, (5) consumer debt has increased to nearly its historical average, (6) real consumer spending hit its pre-pandemic level in early 2021 and has been rising at normal historical rates ever since, and (7) supply chain problems are easing…

“[Furthermore] For fiscal policy, like Biden's stimulus, it takes time for the money to get spent and then a while longer for the spending to affect the economy. In other words, we should expect its peak effects right about now, followed by a steady decline. Monetary policy also takes a while to affect inflation and economic growth… The Fed needs to avoid panicking.”

Kevin Drum, Jabberwocking

From the Right

The right criticizes the Federal Reserve for not acting sooner, and calls for even more rapid interest rate increases.

The right criticizes the Federal Reserve for not acting sooner, and calls for even more rapid interest rate increases.

“There’s a certain amount of irony in cheering the Fed’s new decision to use monetary policy to undo the effects of their free-money monetary policy of the last 13 years, but that’s the world in which we live. The problem is that American energy policy and the war in Ukraine may make it almost impossible to rein in inflation to that level through monetary manipulation alone. To the extent that the Fed has to keep tightening the screws to achieve it, it will do considerable damage to employment as well as investment, and therefore economic growth in general…

“Put simply, monetary policy is a sledgehammer when it comes to combating high inflation. A better approach would have been to dismantle the energy policies that disincentivize production, refining, and investment so as to rapidly lower the price on gasoline and diesel especially. Those are force multipliers for inflation as goods and some services move through distribution chains to end-use consumers…

“That may not have eliminated the excess inflation we experience at the moment — the Fed’s free-money policies since 2009 created the environment for higher inflation — but it would mitigate inflation enough to where the Fed could act more surgically.”

Ed Morrissey, Hot Air

“Will this really be enough to get consumer-price inflation down from 8.6% today to the Fed’s target of 2%? Perhaps, but at this rate it’s going to take a while… The central bankers certainly are optimistic—which makes us wonder if they still think, down in the bones of their economic models, that inflation really is ‘transitory.’ They still seem to believe the main inflationary fault lies with Covid, supply chains and the Ukraine war, not with their monetary policy, so the Fed doesn’t have to do all that much monetary tightening.”

Editorial Board, Wall Street Journal

“Based on market predictions and overall economic conditions, and given that the Fed — both in recent history and over its entire history — is usually behind the curve, a hike higher than the markets were expecting would have been welcome. Instead of talking about how the Fed got surprised yet again, Powell should have been the one doing the surprising…

“So, while a 75-basis-point hike was a good thing to do, 100 basis points would have been better. Remember, real interest rates are still well in negative territory, and a 2 percent federal funds rate would hardly be radical. Fortunately, Powell didn’t talk about the ‘soft landing’ this time and put the cart back behind the horse where it belongs. ‘Inflation can’t go down until it flattens out,’ he said. Indeed — and better to flatten it out sooner rather than later.”
Dominic Pino, National Review

A libertarian's take

“The Fed raising rates means the national debt is going to become an even bigger problem… Right now, we already have a serious expense in just paying the interest on the $30.5 trillion and counting national debt. Just covering the interest costs federal taxpayers about $900 million every single day! Under the status quo, interest payments on the national debt were already projected to rise exponentially and require trillions more in federal taxes in the coming years. According to the Peter G. Peterson Foundation, interest payments are projected to ‘total around $66 trillion over the next 30 years and take up nearly 40 percent of all federal revenues by 2052.’ But, if rates rise more than initially projected, both our future borrowing and some of our existing debt will be much more expensive to finance.”
Brad Polumbo, Foundation for Economic Education

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