Will the Federal Reserve blink amid growing pressure?
We can foresee two significant economic risks in 2023. The first one is a probability that the
Let’s start with the first risk. In theory, to tame inflation, the Fed will need to push real interest rates not only high — as it has already done — but higher than the highest rate that the Fed is now targeting, and in fact much higher than most investors can remember. Such high rates will have two main effects: Popping the stock market and real estate market, along with any other asset bubbles that we’ve witnessed in recent years. The economic downturn that would follow would increase unemployment rates significantly.
On the other hand, if the Fed stops tightening too early, we will continue to suffer high inflation and slower growth. The rise in unemployment might be pushed back for a while, but because no inflationary policy can continue forever, it will inevitably arrive. And the longer we delay its arrival, the worse it will be. Unfortunately, in the face of such challenges, I worry that Fed Chair
First, the pressure that he already faces from, for example, Sens.
Second, as interest rates increase, the amount of interest payments on the government’s debt will grow. With no money to pay those interest obligations, the
Finally, there is the risk that market actors also will pressure the Fed to protect them against losing the inflated wealth they’ve reaped as a result of two decades’ worth of irresponsible monetary policy. In fact, as of now
So, will the Fed blink? Politicians aren’t known for doing the right thing when times get hard and it would be naive to assume that Fed chairs are immune from this. Powell, too, is a politician, as he demonstrated with his unwillingness to acknowledge the surging inflation problem — created by the government’s own spending and stimulus — until it was too late. He could surprise us, of course, by courageously enforcing much-needed monetary discipline.
The second threat comes from politicians in
This so-called bipartisan measure includes an increase of
This 4,155-page bill is guaranteed to be inflationary. It will make Jerome Powell’s job harder and the rate hikes needed to control inflation larger. That in turn will only increase the chance that the Fed will cave to pressure to extend the crisis further into 2023.
But that’s assuming that the Fed won’t cave to the administration and monetize all that new borrowing, adding more fuel to the inflation fire. The bottom line is this, people: Grab your antacids, because if our leaders don’t start thinking differently, 2023 is likely to be painful.
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