Oct 18, 2022
VOT Research Desk
Article
Market Analytics and Considerations
On July 27, 2022, in Washington, DC, Federal Reserve Board Chairman Jerome Powell gives a speech during a press conference. – On July 27, the US Federal Reserve increased the benchmark rate of interest by 0.75%, continuing its long campaign to tame raging inflationary pressure that are straining American household.
The Federal Reserve once again drastically raised its target interest rate by 0.75% at its September meeting. Chairman Jerome Powell responded, “We wish there were a safe way isn’t” when asked about the impact this tightening will have on the economy as a whole. However, there is a simple way: stop hiking rates.
The Fed is not the only one that is obsessed with inflation. Inflation is the most pressing issue for the majority of voters. The Fed’s actions show that everyone agrees that high inflation threatens the stability of the system, lowers living standards, and needs to be cut, even if it means stifling growth and starting a recession.
Consequently, In a speech in Jackson Hole at the end of August, Chairman Jerome Powell said: “Rising interest rates, low growth, and softer wage rates will reduce inflation, but they will also hurt households and businesses. These are the unfortunate costs of reducing inflation. However, far greater distress would occur if inflation targeting was not regained.
However, far greater suffering would result if price stability was not restored. A worrying sign of economic groupthink is the current lack of skepticism displayed by the Fed, the majority of economists, and many businesses regarding the nature of the issue and the solutions available. In short, the Federal Reserve is making a huge error. It should not be doing what it is doing, should not be doing what it is planning to do, or should not have done what it is doing. While past errors cannot be undone, avoiding future ones is possible. Groupthink is preventing progress.
Naturally, there is inflation in the United States and most other nations at the moment. Additionally, there is broad agreement regarding the cause of this inflation: excessive spending by the government as the pandemic began to ease in the spring of 2021; From the pandemic lockdowns that began to break out in the summer of 2021 onward, too much demand that had been held back caused massive supply chain bottlenecks and demand for labor;
Assets like stocks and homes rose as a result of global central banks’ excessive use of easy money; inadequate Fed action until it was too late; and the invasion of Ukraine by Russia resulted in at least a doubling of the prices of oil, gas, wheat, and corn.
According to Larry Summers, a long-time proponent of inflation, the only solution at this point may be to induce a recession through a combination of sharp interest rate increases, spending reductions, and tax increases to quell the fever. In almost every government and central bank in the developed world, the belief that this period of inflation is so dangerous that it is worth the cost of squashing the strongest job and wage market in a generation has taken root. There are deep roots to the belief that inflation causes wealth destruction and political instability.
The belief that fascism and toxic nationalism were brought about by unchecked inflation in Germany and elsewhere and the Great Depression gave rise to the determination to fight rising prices. Even though the equation that inflation equals political breakdown and war is no longer in use, it is still ingrained in the DNA of central banks. Paul Volcker was appointed Fed chairman due to the experience of the 1970s’ “stagflation” and the inability of American policymakers to control it.
He dramatically raised the target interest rate to more than 20%, which led to a recession and prepared the way for a stunning period of economic expansion in the 1980s and 1990s. Nearly a century of central bank orthodoxies has culminated in the current thesis that inflation must be reduced.
However, there is still one important question: Is it real – To likely bring about a recession, dampen financial markets, and cool the labor market, must central banks take aggressive measures – Is it a fact that putting off action for a longer period of time would result in persistently high inflation – And should a robust economic recovery following a global response to an unprecedented pandemic be stifled because waiting will only prolong the inevitable suffering?
