In August, while the Fed was hiking up interest rates to help combat the wildly high inflation, Jerome Powell said that these moves by the Fed would lead to some future pain. No one knew when this pain would hit the economy, but people are starting to suspect now is the time. Sine the Fed had to yet again raise the interest rates up .25 to around 4.75%-5%, banks are failing doe to bad business moves and customer mistrust, and less spending as a whole in the economy, there is much economic pain to go around.
The Feds goal is to get the rate of inflation back down to 2%, which is a very plausible target. The problem is with the struggling banks creating more unrest in the economy. Predictions for the end of the year inflation rate have it being a little over 5%, which granted isn't much higher than where it is now but is a step in the wrong direction. Powell notes that less interest rate increases will be needed until the banking crisis is fixed because that problem will lead to the rate hike.
The big question for all of these things happening is if we are now entering a recession? Powell gives the politically correct answer of we will see. He was hoping for a soft landing from the economy by slowly bring the rates and economic actions back to normal, but one the economy gets close something like the banking crisis happens. He says it's too early to tell if the economy can still use a soft landing, but he isn't giving up hope. The possibility of a recession is definitely higher because of what has happened recently, but like Powell I have confidence that the economy will land on our feet eventually.
https://www.morningstar.com/articles/1145583/are-we-about-to-feel-the-economic-pain-powell-warned-would-be-coming
2 comments:
The main goal of the Fed over the past year has been to control inflation. They have primarily done this through interest rate hike as a way to discourage spending. It is very concerning to see recent failures in investment banks and it will be interesting to see how the Fed will move forward in 2023.
In my opinion, even though reaching 5% of inflation at the end of 2023 is plausible, it is not a good goal as that is still high enough to cause certain damage to the economy. Remember that inflation peaked at 9.1% in June and since then has come down by 3% to 6.1%. Therefore, getting inflation down by only 1% when there are 8 months left is not seen as effective. Also, Powell might have suggested that the rate hike this March might be the last one so I am very curious to see would that be enough to tame this sticky inflation issue. Also, have we reached the bottom yet?
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