**Powell Plans to Seek Quarter-Percentage Point Rate Increase in March**
**‘We will need to be nimble,’ says the Fed chairman**
**by Nick Timiraos, The Wall Street Journal, 3/2/2022**
**While Powell said it was too soon to say how the war and the strict economic curbs imposed by the West against Moscow would influence the U.S. economy, he hinted at growing urgency to continue to tighten monetary policy. ...Mr. Powell and his colleagues “have an expectation that inflation will peak and begin to come down this year,” he said. “To the extent inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively” by raising rates by a half percentage point at one or more meetings later this year....**
**Mr. Powell said he expected the central bank would also make good progress preparing its plans to shrink its $9 trillion asset portfolio but that it wouldn’t finalize them at the March 15-16 meeting....** [end quote]
Today, the stock market is popping because traders are happy that the March interest rate raise will be only 0.25% and not 0.5% as some had been discussing.
As I said in last week’s Control Panel, the markets are very nervous and can turn on a dime. Volatility is high.
Mr. Powell suggested inflation was high because “demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond.” Fed-speak can be a little obscure, but notice that Powell is saying that strong demand is a problem. The Fed can’t influence bottlenecks and supply constraints, but it can influence demand.
Reducing demand means reducing the amount of money consumers have to spend (especially if they have to borrow). Reducing demand means slowing the economy. Short-term rates are influenced by the fed funds rate. Long-term rates are influenced by the Fed’s purchases (or not, or even sales) of long-term Treasuries and mortgage bonds from their gigantic book.
People hate inflation. But they really, really hate stagflation, where the economy stagnates but inflation stays high. And they really hate recessions where people lose their jobs.
The Fed is planning to tiptoe their monetary tightening. But that may not be enough to stop inflation. By summer, they may be forced to tighted more strongly if inflation stays high.
The business cycle has not been abolished by the Covid emergency. I think the stock market will have a hard time handling the next 6 months.