The Fed's rate hikes will hurt. That's unavoidable. - Insurance News | InsuranceNewsNet

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September 23, 2022 Newswires
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The Fed’s rate hikes will hurt. That’s unavoidable.

Bennington Banner (VT)
ANOTHER VIEW

The Federal Reserve raised interest rates Wednesday by 0.75 percentage points, the fifth rate hike this year in the central bank's crusade to tame inflation. Fed Chair Jerome H. Powell said more increases are likely - and they will hurt, slowing growth and weakening the labor market. Unfortunately, there is no other good option.

Inflation must be stopped. Mr. Powell stressed that Americans are already suffering from rising prices, and low-income people have been hit the hardest. Higher prices for basics such as food are eating up the wage growth people are seeing.

The problem will only accelerate, and become harder to fix, if the nation's leaders fail to tackle it now. "I wish there were a painless way to do that," Mr. Powell said.

"There isn't."

The Fed offered a road map. Accompanying substantial rate hikes, the central bank now projects that the economy will grow a mere 0.2 percent this year and expand at a still-weak 1.2 percent rate next year.

Unemployment will rise from 3.8 percent this year to 4.4 percent in 2023. Mr.

Powell warned that it is possible the United States could slip into a recession. Yet the Fed also projects that inflation will fall substantially, setting up the country for long periods of sustainable growth in the future, according to Mr. Powell.

Mr. Powell, as did many others, failed to anticipate the inflationary surge. Yet he is encountering increasing opposition in his fight to redress that error, and the debate will become only fiercer as higher interest rates are felt. Many have already retreated into familiar ideological camps.

Prominent progressives have attacked Mr. Powell's war on inflation, arguing that subsidizing U.S. manufacturing and creating new social programs would bring down prices. Some conservatives insist that the solution is lower taxes and less regulation, the same prescription they offer for any problem. These proposals obscure the essential point: As long as demand outpaces the economy's capacity to supply goods and services, prices will rise.

There are only so many ways to increase supply in the short run, and supply chain improvements or an end to the destabilizing Ukraine war are not guaranteed. Therefore, the Fed must restrain demand by making it more expensive for companies and individuals to borrow and invest.

This is a bloodless way of saying that the job market, wages and economic growth - and many of the people who depend on them - must suffer to avoid even worse economic conditions.

Harvard economist Lawrence H. Summers warns that, in the 1970s, observers engaged in much the same thinking that many Fed critics do today in an effort to avoid such pain. The result was ruinous stagflation, which punished low-end workers the hardest and required a deep recession to finally crush.

Inflation is not as bad as it was at its 1970s peak. There is hope that the Fed will manage to restrain inflation without tipping the economy into recession, achieving a so-called soft landing.

This would require deft timing on the size and pace of interest rate hikes, which in turn would require Fed officials to successfully predict the future. Doing so is particularly hard because interest rate hikes take time to translate into lower inflation numbers.

But the Fed must avoid wishful thinking, even as more people in Washington howl. Mr. Powell is doing just that, and he deserves Americans' forbearance.

- The Washington Post

Older

US economic barometer drops for sixth month in a row, potentially 'signaling a recession'

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The Fed's monetary malpractice will cost you

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