Jerome Powell and the Federal Reserve’s other members are determined to stop inflation. Even if aggressive rate increases slow down the economy, This could spell doom for investors, consumers, and corporate America.
Economists and market experts agree that inflation is on the decline, although it is still high. However, there is a lag effect. In a Monday speech, Lael Brainard, Fed vice chair, stated that the “policy actions taken so far will have an impact on activity in the next quarters.”
The Fed hasn’t stopped raising rates. Investors see a strong likelihood of the Fed raising rates for the fourth time in a row, with a three-quarters increase in percentage points at its next meeting on November 2. The odds of the Fed raising interest rates by 5% for the fifth consecutive meeting on November 2 are increasing.
Powell seems to be trying to make amends for the mistake of calling inflation “transitory” during much of last year. The Fed will keep raising rates to show that it takes inflation seriously. Even if this causes a larger pullback in stocks… and a recession.
This is a problem, it’s obvious. This is especially true since the Fed has two mandates,
price stability, and maximum unemployment. The Fed’s focus on inflation may cause the job market to suffer.
Brian Levitt, Invesco’s global market strategist, stated that “my concern is that Fed tightens so quickly and so substantially without knowing what it means to the economy.”
Remember that the Fed’s recent series of rate increases are unprecedented in the “modern” era of central banking. The Fed’s transparency improved significantly after Alan Greenspan was elected Fed chair in 1987.
Before Greenspan, the Fed was much more transparent. The market didn’t have the same ability to pick apart every policy move, speech, or economic forecast as Wall Street does today. The 1970s and 1980s saw a different kind of inflation, largely due to an oil price shock that lasted for years.
The inflation was not temporary…but the price pressures are finally falling
The current inflation crisis is caused by temporary (but not transitory) supply chain issues linked to the pandemic and the rapid reopening global economy after a short recession.
However, the economy is showing signs of weakness. The long-term yields of bonds have risen and mortgage rates have popped, cooling the housing market. The stock market also has plummeted, which has wrung more wealth from the economy.
Keith Lerner, chief market strategist and co-chief investment officer at Trust Advisory Services, stated that “we’re more cautious as the Fed tightens into a weakening economic environment.” “These massive hikes are the most aggressive in decades.” The Fed is protected from inflation.
As difficult as this current bout is for Americans, it’s nothing to what people experienced in the 1980s when Paul Volcker was Fed chair. He smashed inflation with a series of massive rate increases.
If pricing pressures do not pick up, it seems that the year-over-year increase in the consumer price index (CPI), peaked at 9.9% in June. This is a significant increase from 2.3% in February 2020, just before the pandemic shutdown. However, 9% is still far from the CPI high of 14.6% in 1980 during the Volcker years.
Experts are concerned that Fed’s hawkish attitude will cause more harm than good to the economy, as wholesale and consumer prices have already fallen.
Michael Weisz, president and CEO of Yieldstreet Investment Firm, which specializes in alternative assets like real estate, private equity, and venture capital, said that “the Fed’s rapid rate of increasing rates will have some unintended effects.”
Rate increases will eventually slow down the economy and harm the job market
Weisz stated that an increase in interest rates could cause a “consumer debt crunch” in which loans other than mortgages may become more costly and more difficult to obtain.
Rate increases increase the cost for companies to repay their debts, increasing the risk
of corporate bankruptcy and defaults on commercial loans. It could even lead to stagflation, which is the double whammy of continued inflation and stagnant growth. This means that prices will likely remain high while the job market will be more difficult.
Weisz stated that the Fed is at risk of over-tightening as the effects of its restrictive policy may not be reflected in inflation and unemployment data until too late.
The Fed will continue to work harder to control inflation as long as it is the main economic problem. The unemployment rate has fallen to 3.5% in the last half-century.
Dustin Thackeray is Crewe Advisors’ chief investment officer. He stated that the Fed has made price stability their top priority. “Until the Fed has sustained evidence that their monetary policy has a material effect on…the labor market, they will continue to exert their persistent efforts to rein in inflationary pressures.”