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Before the Ukraine War began, inflation rates hit a 40-year-high. The word on The Street was that the Fed was going to raise interest rates 0.50 percent after a year of denying inflation was rising… claiming inflation was just “temporary” and then “transitory.”
It should also be noted that for nearly a decade, they were selling the line that when inflation hit above their magic number of 2 percent, they would raise interest rates.
On 2 March, with the Ukraine War escalating, in testimony to Congress, Fed Chair Jerome Powell said the central bank would raise its key interest rate now by only 0.25 percent.
“We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment,” Powell said.
Powell’s comment effectively settles the debate over whether the Fed might take the unusual step of bumping rates by a half-point at once when it meets this month.
The Core Personal Consumption Expenditures Price Index (PCE), the Fed’s favored inflation measure, rose another 0.5 percent in January to an annual rate of 5.2 percent.
“This is strong, high inflation and it’s very important that we get on top of it and that’s exactly what we’re going to do,” Powell pledged.
The Fed’s policy committee expects inflation to peak and begin to ease soon, Powell added, but “to the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively.”
Powell’s comment leaves open the door to a half-point hike this summer if the bank sees that inflation remains unchecked.
The last time the Fed raised rates a half-point in one sitting was in 2000. The central bank has not raised rates at all since 2018.
Some lawmakers chided Powell over the bank’s delayed action to address inflation.
“I always thought there was a chance we’d be wrong, and if we were wrong we’d be able to pivot and we pivoted pretty quickly,” he said, referring to his December testimony in which he admitted that the Fed had failed to respond quickly enough to rising prices.
“But by then, the economy really was moving very, very fast,” he added.
TREND FORECAST: The economy was moving even faster, and there was a case to be made for a half-point hike, but the Fed is unlikely to take such a bold step now.
The U.S. and world economies are threatened by the instabilities and historically spiking inflation as a result of the fallout from the Ukraine War…which is causing the Fed to remain cautious.
Thus, the expectation on The Street, and from the comments from Powell, is that the central bank will raise its interest rate a quarter-point next week, fearing that a larger hike will harm the economy.
Instead of a larger boost at one time, the Fed will opt for a series of hikes, each one followed by a diagnosis of the effects on inflation, jobs, and economic output.
Meanwhile, the Ukraine war and its after-effects will drive inflation higher, threatening a global recession and Dragflation, one of our Top 2022 Trends.