Fed Chairman Jerome Powell testified before the Senate yesterday and the House of Representatives today.
https://www.wsj.com/articles/feds-jerome-powell-to-head-to-t…
**Jerome Powell Pressed Over How Fed Would Respond to Economic Slowdown**
**‘We can’t fail on this. We really have to get inflation down,’ Fed leader tells Congress**
**By Nick Timiraos, The Wall Street Journal, June 23, 2022**
**....**
**Lawmakers pressed Federal Reserve Chairman Jerome Powell over how the central bank would manage trade-offs it could confront if its interest rate increases slow the economy sharply but don’t reduce inflation quickly.**
**Mr. Powell on Thursday said that in such a scenario, the Fed would be reluctant to shift from raising rates to cutting them until it saw clear evidence that inflation was coming down in a convincing fashion....**
**Powell was asked how its rate policies would shift if economic growth stalled and joblessness rose. “In that hypothetical situation, that would be a setting in which inflation could be expected to come down,” Mr. Powell said, which could meet a test the Fed has established to slow or stop rate rises. But he added, “I think we’d be reluctant to cut.”...**
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The Fed tried to raise the fed funds rate in late 2018 but Powell caved quickly and cut them when the markets fell and hedge funds were hurt by rising interest rates.
But inflation was low at that point.
Powell is very aware of the mid-1970s, when the Fed raised rates aggressively but, in hindsight, backed off too soon and failed to break the back of high inflation, forcing stiffer action later. Powell admires Paul Volcker who increased rates in 1980 to quell inflation despite a serious recession with high unemployment. The stock market hit its secular low in 1982.
Our decisions as investors are deeply impacted by Powell’s decisions. If Powell raises the fed funds rate to neutral and holds it there regardless of the stock market and unemployment rate there will be a recession. I think it’s the right thing to do. I’m not alone.
https://www.wsj.com/articles/fed-official-calls-for-addition…
**Fed Official Calls for Additional Significant Rate Rises**
**Michelle Bowman says the central bank needs to raise interest rates above certain measures of anticipated inflation rates**
**By Nick Timiraos, The Wall Street Journal, June 23, 2022**
**...**
**Economy**
**Fed Official Calls for Additional Significant Rate Rises**
**Michelle Bowman says the central bank needs to raise interest rates above certain measures of anticipated inflation rates**
**Fed governor Michelle Bowman said she strongly supported the central bank’s 0.75-percentage-point rate increase last week.Photo: ann saphir/Reuters**
**By Nick Timiraos**
**June 23, 2022**
**A Federal Reserve official said the central bank would need to raise interest rates aggressively this year in order to combat inflation.**
**Fed governor Michelle Bowman said she strongly supported the Fed’s 0.75-percentage-point rate increase last week and that she would favor raising the central bank’s benchmark rate by another 0.75 point, or 75 basis points, at the central bank’s next meeting, July 26-27...**
**Ms. Bowman said she supported raising short-term interest rates so that — after adjusting them for inflation, or in “real” terms — they are no longer negative. Last week’s rate increase brought the central bank’s benchmark federal-funds rate to a range between 1.5% and 1.75%. Ms. Bowman called for measuring the setting of interest rates against near-term inflation expectations, which certain surveys show are anywhere between 3% and 6%....**
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The Fed’s ZIRP policy actually produced negative REAL rates for a long time. This produced highly speculative bubbles in all assets. The neutral rate needs to be a positive real rate.
If Powell follows this reasoning there will be many more Fed rate raises to come. This will depress asset prices long before inflation comes down.
Wendy