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Is the Fed’s Rate Hike Too Much or Too Little?

The Federal Reserve hiked interest rates by three-quarters of a percentage point on Wednesday, in the hopes of curbing the U.S. economy’s excessive inflation.

Despite the fact that markets and economists had expected such a raise, the hike — the central bank’s largest since 1994 — nonetheless came as a shock. Here’s where things stand in the debate over the major shift:

It’ll take a lot more than that.

The Wall Street Journal Editorial Board suggested Wednesday that such a hike shows the Fed is now “slouching toward inflation reality,” albeit the bank may still need to do more. “The Fed is phasing in rate hikes, but it doesn’t believe it will need to go all the way up to beat inflation.”

Yes, it’s possible that Wednesday’s boost (together with the one scheduled in July) will slow price increases, but “at current rate, it’ll take a while,” the board noted. The bank is on the right track, and its optimism is admirable — but is it realistic?

“It will take more than one 75-basis-point hike to restore the Fed’s credibility in battling inflation after two years of failures,” the board said, “and Americans will believe it only when they see it in dropping prices.”

The choice exemplifies bravery and individuality.

Powell has “gone a great way toward restoring the Federal Reserve’s reputation as an inflation-fighting institution — and delivered a lesson in how government runs when presidents respect institutions,” wrote contributing Washington Post columnist Sebastian Mallaby.

In fact, Mallaby noted, Powell can only deliver such “strong medicine” because of President Biden’s support. “Biden has liberated Powell to do the right thing without having to worry that vacant Fed board seats would be filled by presidential loyalists who seek to undermine him,” said Biden, who previously pledged to maintain the central bank’s independence.

However, the chairman’s work is “far from done,” and he will very surely have to start a recession to get things under control – a strategy that will almost certainly alienate him (and Biden) from the American public. “The only thing less popular than inflation is its cure,” Mallaby remarked, using the 1970s as an example.

ECONOMY

This was necessary for both the US and the Fed.

Prior to the official decision, Steven Rattner, who served as counsellor to the Treasury secretary under former President Barack Obama, opined for The New York Times that not only did the economy require a three-quarters of a percentage point rate hike, but that the Fed should have done so much sooner. Of sure, the war in Ukraine has contributed to increased prices — “but so have policy blunders, for which the central bank, as well as the Biden administration, have substantial responsibility.”

As a result, the Fed “must make reparations for its faults,” according to Rattner, and a “75-basis-point hike… would be an unprecedented step.” The Fed’s poor credibility would be bolstered by such a hike, “combined with a firm declaration that it will continue to handle inflation aggressively.”

Mark Carney, the former governor of the Bank of England, similarly criticised the Fed’s lack of active monetary policymaking in an interview with Bloomberg. According to The Guardian, “central bankers need to catch up to their economy.” “They’ve admitted that they’ve been behind the curve. They must begin to raise interest rates above inflation, or at least above inflation predictions.”

Consider the unforeseen effects of your actions.

Judy Shelton, a senior fellow at the libertarian Independent Institute, said in The Wall Street Journal after the bank’s decision that the “unintended consequences” of high interest rates, such as bankruptcies and defaults, should “prompt us to reassess how the Fed intervenes in the economy.”

Shelton pondered, “Neither artificially high nor artificially low interest rates are most conducive to constructive economic progress.” “In a market economy, genuine price signals — real interest rates — are required.”

This… is not good.

Desmond Lachman of the American Enterprise Institute told CNN that “history will not be kind to the Jerome Powell Federal Reserve.” “The Fed is now stepping too firmly on the monetary policy brakes, much like it had its foot on the accelerator for too long last year,” says one analyst. For one reason, Fed-caused decreases in equities and bond prices will “almost likely” lead to a reduction in consumer spending, which is “the last thing an already faltering US economy needs,” according to Lachman.

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Powell might “do well to heed his own advice of needing to be humble and nimble, especially given today’s highly fragile financial markets,” lest he bear responsibility for pushing the US into a downturn, as the bank’s “newfound monetary policy hawkishness” is driving the country straight into a recession.

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