The US Central Bank, the Federal Reserve, today raised its benchmark interest rate 75 ‘basis pts’ (3/4 %). And promises more of the same in July and thereafter in rest of 2022. Will it halt inflation? Or precipitate recession sooner? What are the contradictions in Fed decision?
Fed chair Jerome Powell’s announcement today targets, as Powell himself indicated in press conference following the announcement, consumer Demand and spending to bring down inflation.
But Powell himself admitted several times in his press conference Q&A session that raising rates will have no effect on Supply problems and global political instability driving US inflation–specifically global commodity prices, supply constraints caused by the Ukraine War (and by implication US sanctions on Russia), China’s slowing economy due to its recent Covid shutdowns and its impacts on global supply chains, and on continued supply chain problems world wide in general.
So how will targeting Demand and consumer spending contain an inflation that is driven primarily by global supply, global political instability and, I might add, monopolistic US corporations manipulating supply issues to raise their prices? Short answer: it won’t. Targeting US Demand (aka US consumer) to resolve a global Supply problem will have little to no effect in short run, although will should rapid rate hikes precipitate a US recession by year end 2022.
US elites and capitalists have decided to ‘wash their fiscal policy hands’ and to let the Fed address the inflation crisis more or less on its own. Consumer prices are both chronic and embedded in the economy, averaging 8.5% (CPI) last 3 months and equally chronic in producer prices (PPI) rising even faster around 11%. Fiscal policy solutions to address inflation are DOA: there’ll be no tax hikes and reducing fiscal spending given plans to escalate Pentagon $54B new war spending for Ukraine recently and the projected further $85B called for in the next US budget.
Powell’s decision to accelerate and increase rate hikes means US elites have decided that Monetary policy–i.e. the Fed–now has the task alone to try to control inflation. It’s the only inflation game in town. Politicians facing elections will have the Fed ‘take the heat’ for failing to control it. That means the ‘pain’ will be on the backs of the American consumer as Fed rate hikes come faster and larger now, depressing the real economy, jobs, wage incomes and consumption as a solution parading for what is really a global Supply side (war, sanctions, commodity speculation, supply chains, China, etc.) caused inflation.
The Fed’s Powell believes by raising rates 75 basis points every six weeks between now and December, h can achieve a ‘soft landing’ of the US economy. The Fed’s prediction is prices will come down to 2% in 18 months without a recession and without the unemployment rate rising from current 3.7% to no more than 4.1%. GDP this year will still achieve around 2% (despite its -1.4% contraction 1st quarter 2022 and the Atlanta Fed recent forecast of 0% growth this 2nd quarter, which means a GDP growth rate in second half of 2022 of around 5%. How that 5% second half growth occurs with a planned Fed doubling of its interest rate levels between now and year’s end will be an interesting economic trick.
For more of my commentary in the following radio interview (and subsequent interviews to be posted)
GO TO:
https://drive.google.com/file/d/1wkRYqhvUwuxg-nkUNNO6Ua7vEAtQmySN/view
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
This brings up the central thesis of Central Bankers on the Ropes: has monetary policy come to the end as an effective economic tool? That the real life experiment will be played out at the expense of the lower 90% is truly grotesque Remember that the Greenspan put low interest rates were one of the central tenets of Neoliberal theology this 180 degree about face is truly astonishing and a reflection of how theology easily changes to serve the Fortune 500