While speaking at the annual Federal Reserve Jackson Hole Economic Symposium (hosted by the Federal Reserve Bank of Kansas City), Chair Jerome Powell reaffirmed a commitment to continue forcefully fighting inflation with additional rate hikes. Powell remarked “restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance”, and “reducing inflation is likely to require a sustained period of below-trend growth”, all while “… there will very likely be some softening of labor market conditions.”
As a synopsis, it sounds like the Fed will continue to raise rates, it may take a while for inflation to stabilize, and there may be an uptick in unemployment. Do remarks like this instill confidence?
Chair Powell continued… “of course, inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”
Is the Fed taking the necessary steps to curb inflation or the expectations of higher inflation?
Though most have felt the inflationary effects on everyday pricing, let’s look at some numbers while keeping in mind the Fed target rate of 2% inflation. On an annual basis, the inflation rate (as measured by CPI) started the year (January, 2022) at 7.5% and has gone as high as 9.1% in June, a four-decade high. Inflation didn’t start to take a bite out of budgets this year- as the economy started to rebound from Covid-related shutdowns in the spring of 2021, it started rising sharply above the 2% target rate. Let’s repeat that- inflation has been spiking since the spring of 2021. Add to that, first-quarter Gross Domestic Product (GDP) numbers contracted in April by 1.6%, with an additional .9% second-quarter contraction reported in June. All the while, the Fed raised rates in March of this year, a .25 percentage point increase, the first hike since 2018.
If the Fed is trying to control inflation, then what took them so long to make a move?
While an additional .75 percentage point rate hike was applied in June and another in July, inflation started to run wild in the spring of 2021! Is this how previous Fed leaders would have handled things… wait until inflation is completely out of control and then move to act?
I’ve included a good commentary on this situation from the “Grumpy Economist” John Cochrane from the April edition of the Chicago Booth Review- his words are just as relevant today. Give it a read and let me know your thoughts!
~ Brian Kasal- The Leadership Matrix
Click here- Why Hasn’t the Fed Done More to Fight Inflation?
P.S.- Did you see my last Leadership Matrix post? Are More Price Gouging Laws Needed in the U.S.?
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