**Powell Says Fed Must Accept Higher Recession Risk to Combat Inflation**
**Federal Reserve is raising interest rates at aggressive pace as price pressures hit 40-year high**
**By Nick Timiraos, The New York Times, June 29, 2022**
**Federal Reserve Chairman Jerome Powell said he was more concerned about the risk of failing to stamp out high inflation than he was about the possibility of raising interest rates too high and pushing the economy into a recession.**
**“Is there a risk we would go too far? Certainly there’s a risk,” Mr. Powell said Wednesday. “The bigger mistake to make — let’s put it that way — would be to fail to restore price stability.”...**
**Most Fed officials have said they want to raise the fed-funds rate quickly to between 3% and 3.5% later this year before assessing how much higher to lift it next year....** [end quote]
Powell has said this before. He’s repeating it so the markets will understand that he’s serious.
The Fed is targeting a “neutral” fed funds rate that will neither stimulate nor slow the economy. Only when the inflation rate maintains the Fed’s target of 2% (or near) for months will the Fed be satisfied and hold the fed funds rate constant instead of raising it.
The Fed will not cut the fed funds rate as long as inflation is not stable at 2%. Even if there is a recession. Even if there is a severe recession, like 1980. Powell admires Fed Chair Paul Volcker and that was Volcker’s winning strategy, even though it was tough.
Investors who expect a return to bubble valuations caused by emergency monetary and fiscal stimulus in 2020-2021 will have to wait a long time. Even if the economy has a soft landing and inflation recedes without a serious recession, the stimulus that pumped up the bubble will not return. It will take time (months? years?) for the market to recover its bubble level by means of real economic growth.
The economy is already contracting:
The U.S. economy shrank at an annualized pace of 1.6% in the first quarter, reflecting a deeper contraction than previously reported.
The interest increase should dampen consumption even more. Likely the 2nd quarter will have a further contraction of GDP meeting the classic definition of a recession.
Now we just wait & see how inflation is affected by the rate increase.
There is chatter that inflation is going to trend down as well as retail is looking at a supply glut in the near future.
I lost a ton of respect for Powell in December 2018. I simply don’t trust what he is going to do now, nor have any idea what impact it is going to have.
The article I saw had the fateful phrase “soft landing”. Has there ever been a “soft landing”?
WASHINGTON – Federal Reserve Chair Jerome Powell said there’s “no guarantee’’ the central bank can tame runaway inflation without hurting the job market.
Speaking Wednesday at a European Central Bank forum in Sintra, Portugal, Powell repeated his hope that the Fed can achieve a so-called soft landing — raising interest rates just enough to slow the economy and rein in surging consumer prices without causing a recession and sharply raising the unemployment rate.
The context makes it clear, “jobs” take a back seat to working the inflation issue.
Powell Says Fed Must Accept Higher Recession Risk to Combat Inflation
Federal Reserve is raising interest rates at aggressive pace
So last week, before The Senate Banking Committee hearing, Powell told members that no matter how high the Fed increases the rate it will not have any effect on inflationary prices on Energy, gas at the pump, food prices, and steep inflation in the housing market for renters. In fact the rental market is a problem with supply and demand and higher borrowing costs will only slow construction of new housing rental units And put even more inflationary pressure on renters.
So, increasing the federal funds rate will only put the brakes on wages. If the unemployment rate can hit 8%, then employers will have a more compliant labor market to accept reduced wages. So while energy, gas at the pump, housing in the rental market and food costs will continue to increase wage earners will have less money to pay for it…
Gotta Love the Federal Reserve
If the unemployment rate can hit 8%, then employers will have a more compliant labor market to accept reduced wages.
Yup. Someone else around here has been saying that the now overwhelmingly non-union labor force will see recent wage gains quickly vanish with the slightest softness in the “jobs” market.
Maybe the “New” Supreme Court will revisit the Dred Scott Decision
So while energy, gas at the pump, housing in the rental market and food costs will continue to increase wage earners will have less money to pay for it…
Gotta Love the Federal Reserve
Yes, but they will still take those road trips and put them on the credit card?