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As we noted, we got it half wrong. Since “It’s the economy, stupid,” we had forecast that President Joe Biden would pressure the Federal Reserve not to raise interest rates 75 basis points last week to help boost the equity markets and voter sentiment prior the mid-term elections.
But that didn’t happen and as evidenced by the Dow jumping 423 points yesterday, it was not necessary.
Last Wednesday, the U.S. Federal Reserve’s Open Market Committee added three-quarters of a point to the central bank’s key federal funds rate, the fourth consecutive such increase, lifting the rate to between 3.75 and 4 percent.
The new interest rate is the highest since 2008, just before the Fed slashed rates to help the economy cope with the Great Recession. On the news of the rate hikes, the Dow Jones Industrial Average fell 505 points, bringing the Standard & Poor’s 500 index down 2.2 percent. Bond yields edged up.
Bond prices tracked by the Bloomberg U.S. Aggregate bond index are down 15 percent this year as of last week, with yields on the benchmark 10-year treasury note up 1.4 percentage points since 1 August, the biggest three-month gain since 1984.
“Restoring price stability [will] set the stage for achieving maximum employment and stable prices in the longer run,” Fed chair Jerome Powell told a press briefing after the committee’s meeting.
“The historical record cautions strongly against prematurely loosening policy,” he noted. “We will stay the course until the job is done,” although “to the extent rates have to go higher and stay longer, it becomes harder to see the path” that leads away from recession.
The job might become less demanding soon, he hinted.
“It will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2-percent goal,” Powell said.
“That time is coming and it may come as soon as [the committee’s] next meeting or the one after that,” he added, although “no decision has been made.”
“Sometimes you act a little more deliberatively,” Thomas Harkin, president of the Federal Reserve Bank of Richmond, said last week in comments quoted by the Financial Times. “The implication is probably a slower pace of rate increases.”
Susan Collins, president of the Boston Fed, added that it is “time to shift focus” from how fast rates are increasing to how high they need to rise to stymie inflation.
“Therefore, smaller increments will often be appropriate,” she added.
However, “incoming data suggest that the ultimate level of interest rates will be higher than previously expected,” Powell cautioned.
Fed officials indicated at their September meeting that they expected to set rates at about 4.6 percent early next year. Powell’s remark indicates that figure may rise.
Already, the Fed’s hikes have driven the average interest rate on a 30-year, fixed-rate mortgage above 7 percent and interest on some adjustable-rate credit cards beyond 19 percent.
Fielding complaints from Senator Sherrod Brown (D-Ohio) and others that the Fed’s aggressive rate increases were harming family budgets, Powell said, “we’ve always said it was going to be difficult. It’s very premature to be thinking about pausing” the rate boosts.
“I don’t have any sense that we’ve overtightened or moved too fast,” he said. “I think it’s been a successful program that we’ve gotten this far this fast,” but “remember we have some ground left to cover and cover it we will.”
PUBLISHER’S NOTE: Powell always said controlling inflation would be difficult except for the months when he kept insisting inflation was a passing economic burp.
At his December 2020 press conference, Fed-Head Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July 2021, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens,” he noted.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation in 2021 would be 2.4 percent.
Instead, it topped 6 percent in October 2021 and has averaged 4.1 percent from January through October last year.
Until November 2021, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
In Congressional testimony in December 2021, Powell admitted it is “probably a good time to retire” the Fed’s characterization of inflation as transitory.
It also would have been a good time to retire Powell, given his track record, but president Joe Biden renominated him last November to keep his job. Powell’s current term expires May 15, 2026.