Controversy about 'Fed fighting overinflation', Fed raises interest rates sharply for the fourth time in a row

The US Federal Reserve (Fed) on November 2 continued to raise the reference interest rate by 75 basis points, aiming to cool down the 40-year high inflation.

The reference interest rate in the US is currently in the range of 3.75-4%. This is the highest level since January 2008.

Thus, since the beginning of the year, the Fed has increased interest rates a total of 6 times. In which, the last 4 times all raised by 75 basis points, in the sessions of June , July , September and November.

The decision to raise interest rates yesterday was made after a two-day policy meeting of the Federal Open Market Committee (FOMC) of the Fed. This is the agency's strongest move since the 1980s, which could affect millions of US businesses and households by pulling lending rates higher.

Reference interest rates in the US for the past 30 years. Chart: CNN

It also has the potential to cause a recession. In the following press conference, Fed Chairman Jerome Powell acknowledged the probability of a soft landing - cooling the economy without creating a recession - was narrowing. Still, he thinks it's possible.

"The inflation picture is increasingly challenging this year," he said. "This means we have to tighten policy more, which means narrowing the path to a soft landing."

He also reaffirmed his commitment to cooling down inflation. Powell's stance is that persistent, high inflation will have larger economic consequences than a recession.

The latest figures show that home loan interest rates in the US are at a near 20-year high, leaving the housing market bleak. New home sales fell 10.9% in September compared with August. Compared to the same period last year, the decline was 17.6%.

However, inflation pressure has been somewhat eased. According to the Recruiting Costs Index, wages rose only 1.2% in the third quarter, down from 1.6% in the second quarter.

The market now awaits the October US jobs report, due tomorrow. Analysts expect the world's largest economy to add 200,000 new jobs, down from the previous month, but still at a record high.

Yesterday's Fed announcement also hinted at a policy change, writing that in deciding whether to raise interest rates, it will "consider the total level of monetary tightening, the lag of the impact on economic activity, inflation, the economy and the economy. economic and financial". Economists expect this to be a sign that the Fed may cut interest rates by 50 basis points at next month's meeting, and raise less in 2023.

Increasingly criticized for being too anti-inflationary, the Fed and its supporters want the market to accept short-term pain.

To curb soaring consumer prices, the US Federal Reserve is acting at its fastest pace in decades. They have raised interest rates five times since March and will sharply increase two more times for the rest of the year.

Even when experts warned that the US economy could therefore fall into a recession, the Fed said it still did not give up the plan. Fed economists and pundits are beginning to argue that the central bank is too aggressive to correct past mistakes, causing the economy to slow down.

Many of the critics are the same people who supported the Fed delaying rate hikes last year. These are decisions aimed at helping the labor market recover as much as possible, despite high inflation.

Now, they turned their backs on the Fed as a series of growth forecasts were cut, the stock market plunged, and the impact of the rate hike was still unclear. To complicate the situation, many other major central banks around the world also simultaneously raised interest rates, creating an unprecedented precarious economic experiment.

Greg Mankiw is an Economist at Harvard University and a former chairman of the Council of Economic Advisers during the George W. Bush administration. He thinks the Fed is slowing down the economy too much. According to this expert, the Fed has never been in such a situation.

"It's easy for novices to overreact and then if you swing too much in the other direction, it can be more destabilizing than stable," he says.

Fed headquarters in Washington DC. Photo: Reuters

Central banks continue to face new challenges. The United Nations Conference on Trade and Development (UNCTAD) and the WTO both warn of a global slowdown as interest rates rise in major economies. The IMF on October 11 lowered its global growth forecast and said " the worst is yet to come ". Last week, OPEC+ announced an oil production cut .

The Fed also lowered its forecast for US economic growth this year. No one knows how long it will be before the rate hike has full impact. "We're starting to see an impact in some areas, but it will take some time for the cumulative tightening to spread throughout the economy and bring down inflation," Fed Vice President Lael Brainard said. on 10/10.

Major stock indexes slid as Wall Street panicked over the Fed's announcement of more rate hikes late last week. Indices also fell earlier this week, with the Nasdaq hitting a two-year low on Oct.

However, unlike other parts of the economy, central banks have no specific goal of cooling down the stock market. In recent weeks, officials have attributed the volatility on the floor not only to themselves but from a variety of economic indicators.

Fed Governor Christopher Waller said he had seen speculation that financial stability concerns could prompt the Fed to slow or pause rate hikes. However, he insists that is not what is being considered.

Going into the end of the year, the Fed's inflation-cutting campaign could undermine the remaining strengths of the US economy, according to the Washington Post . However, the Fed said it is focused on inflation and has no reason to stop pushing rates up.

They expect rate hikes by 0.75 percentage points at the November meeting and 0.5 percentage points in December. "Reports over the past few months suggest that high inflation persists, while the labor market remains strong," said Fed Governor Lisa Cook.

The Fed has kept interest rates near zero for much of the pandemic, even as inflation soars. Since March of this year, they have only accepted to raise interest rates. The Fed raised 0.75 percentage points for the third time in September, bringing the benchmark interest rate from 3% to 3.25%, higher than it has been since 2008.

But the rate hike didn't have an immediate effect. Meanwhile, criticism has grown with lawmakers and Fed watchers that the fight against legislation is being targeted in the wrong direction. Accordingly, raising interest rates reduces demand in the economy, but does not fix supply-side problems, such as shortages of oil and gas, affordable apartments or chips for cars.

According to critics, inflation will somewhat ease on its own as supply chains are cleared and the pandemic continues to ease. But after months of the Fed trying to cool down demand, businesses may have to stop hiring and lay off staff before soaring input costs are stabilized.

Lindsay Owens, executive director of the Groundwork Collaborative - a group focused on economic policy, said that the idea of ​​​​addressing global supply shocks with interest rate policy will increasingly reveal its irrationality over time. time. She compared the risks associated with the Fed's approach to a frog sitting in a boiling pot of water. "You don't know you've been cooked until it's too late," she said.

The Fed's tools may be limited, but its job is to keep prices steady and foster a strong job market. Fed officials say that if they don't raise rates enough now, inflation will only worsen and force stronger action later. The Fed also seems to be calculating that the jobs market is already too strong to take some damage to return to normal.

They also acknowledge the economic pain that could be coming to the stock market or people's pockets. But the Fed's position is steadfast. "What you're hearing is voices from Wall Street, which has lived on cheap money for a decade. And I'm sorry, times have changed. My message is: Take it," Douglas Holtz said. -Eakin, Chairman of the American Conservative Action Forum, former director of the Congressional Budget Office, commented.