The inflation problem could last for years

Photo: Jim Lo Scalzo/EPA-EFE/Shuttersto

Listen long enough to Jerome Powell, the chairman of the Federal Reserve, and you’ll probably hear him tell you that the central bank doesn’t act so much as it reacts. At a press conference in Washington, D.C., Powell described Wednesday’s central bank interest rate hike of 0.75% – the biggest increase since 1994 – as a response to rapidly deteriorating economic conditions. in the United States, especially the higher and worse inflation numbers. consumer sentiment which came out last week. Asked about the future, he hesitated. “It’s a very uncertain environment, an extraordinarily uncertain environment,” Powell said. “We will be determined and resolute – but flexible.” There could be other such large and sudden jerks in the money supply in the coming months, he said, but he would have to wait for the data. This is in stark contrast to the last time the Fed made such a move – with then-Fed Chairman Alan Greenspan rapidly tightening the money supply as “preemptive strikein the face of an inflationary threat that was just beginning to materialize.

And so we American consumers expect and hope for the best – and it could be years before things get better. What is extraordinary is not really the size of the hike – it was telegraphed via a the wall street journal article Monday – but how long the central bank thinks this period of economic pessimism will last. According projection by the bank’s own board of governors, it could be 2024 before inflation has cooled enough for it to start cutting rates again, with or without a recession. Before that, interest rates are likely to double – remember, the higher they rise, the more painful it becomes to borrow and spend – and then some until next year. So if you think it’s already hard to afford your current lifestyle, hold on.

The Fed is a powerful institution, an independent arm of government that has almost unchecked power to create and destroy jobs and credit. He has also, in recent years, been one who has been reluctant to acknowledge the underlying threats to the economic situation. When inflationary pressures began to materialize last spring, the central bank called them “transitional”. It was simply the result of buying and selling imbalances because of the pandemic and things would work out, the Fed argued. It was, after all, the time when COVID vaccines were first rolled out, a ridiculously optimistic time when it looked like the world’s biggest problem was about to go away. But Powell and his colleagues at the Fed were clearly wrong, as we are now in the worst inflationary environment in 40 years with no real end in sight. To his credit, Powell has clearly internalized the inflation problem now and appears to be trying to catch up. “The worst mistake we could make would be to fail, which is not an option,” he said. “We need to restore price stability. We really do. It is the bedrock of the economy. If you don’t have price stability, the economy really won’t work the way it should.

When we get there, it’s not exactly clear. The Fed’s projections can change drastically. For example, central bank governors have been faced with a much simpler problem in March, thinking they would need fewer interest rate hikes to bring inflation under control. And the reality is that, despite the power of the Fed, its sphere of influence does not encompass the entire universe. During his press conference on Wednesday, Powell noted the Fed’s limitations in resolving all of the country’s financial problems. The war in Ukraine is inflating oil prices and COVID policies in China are blocking supply chains, to name just two big geopolitical issues over which Powell has virtually no influence.

Of course, the stock market rallied after Powell’s remarks, as Wall Street hopes the Fed will move faster and put an end to this whole thing of inflation. But can it really work? Geopolitics killed a decade of market optimism. It’s not hard to see a world where this trickles down to the wider economy, especially if the period of rising prices continues. Consumers are already exhausted, judging by the consumer sentiment survey that Powell cited as one of the reasons for today’s 0.75% rise. The Fed can make it harder to buy cars and homes, curb affluent spending and reliance on debt, and tie up businesses so they’re forced to shed their workforce – which is already becoming apparent. Maybe it can lower inflation and make people’s daily life easier. But Powell’s Fed has been too optimistic before, and this time, with Russia and China holding the price of American goods in their hands, they may still not be grappling with the depths of the problem.

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