Fed Chair Jerome Powell announced last mid-week that the central bank is preparing to raise interest rates in early March.
Interest Rates to Rise Sooner Rather than Later
In last mid-week’s latest Federal Reserve meeting, Jerome Powell, Fed Chairman, issued a policy statement, “With inflation well above 2% (currently 7%) and a strong labor market nearing “maximum employment” (with unemployment at 3.9%), the (rate-setting) Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
That’s policy-speak for the central bank saying it’ll start raising interest rates from their current level of near zero at its next meeting the beginning of March.
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Powell-speak: “…The economy no longer needs sustained high levels” of monetary support.
Job Growth Slowing in Recent Months
Though job growth has been slowing in recent months and millions of people have opted out of the labor market, Powell said that the Fed can’t afford to leave inflation unchecked. Powell told elected officials earlier in January that “To get the kind of very strong labor market we want with high participation, it’s going to take a long expansion. And to get a long expansion, we’re going to need price stability.”
Price Hikes instead of Price Stability
Rather than Powell’s wish for “price stability,” we’ve seen just the opposite. Consumer spending has been off the charts due to generous government relief packages. Workers and supplies have been scarce. Businesses have struggle to keep up with demand and they’re raised prices.
New car prices jumped +12% in the last year due to semiconductor shortages. (The Commerce Department warned last week that the semiconductor shortage is not going to ease any time soon.) Used car prices have soared +37% mostly due to there being such a short, if any, supply of new cars. Gasoline and groceries are more expensive. Price-checkers say that inflation is up in more than two out of three categories.
The Federal Reserve’s Response
Powell said, “We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing and transportation. We will use our tools to support the economy and a strong labor market to prevent higher inflation from becoming entrenched.”
Translation: raising interest rates is intended to cool consumer demand; the Fed’s shrinking of its portfolio of government debt and mortgage=backed securities is intended to push up long-term borrowing costs across the economy.
Unknowns
The Fed is expecting inflation to cool when/if COVID’s Omicron outlook improves and shortages of workers and supplies improve.
But, Powell said, “I don’t think two years ago, we thought we’d still be having record levels of cases. Getting past the pandemic is the single most important thing we can do.”
The thrust of the Federal Reserve’s most recent posture is that the central bank is “prepared to adjust interest rates more – or less – aggressively, if actual inflation turns out to be higher or lower than forecast,” said National Public Radio.
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Thanks to National Public Radio and The New York Times.
