Swamponomics: Fed Raises Rates – But Is it Enough to Fight Inflation?

The March Federal Open Market Committee (FOMC) policy meeting is in the history books. The Federal Reserve raised interest rates by 25 basis points to increase the fed funds rate to 0.5%, planning six more rate hikes this year. But will this be enough to put the kibosh on 40-year high inflation? The consensus among market analysts and economists is that the latest tepid tightening pursuit will fail to put a lid on higher prices. With soaring energy costs, the intensifying Ukraine-Russia military conflict, and the continuation of The Great Resignation, what is next for the world’s most powerful institution today?

Behind the Curve

Listening to Fed Chair Jerome Powell's news conference following the much-anticipated FOMC meeting would make observers think he was either a broken-record or stuck with a script of talking points. "We will take the necessary steps to ensure that high inflation does not become entrenched." "We’re fully committed to bring inflation back down." Different wording same sentiments.

Powell and his merry band of monetary policymakers outlined plans for the central bank's tightening journey. The Fed expects the policy rate to climb to 1.9% by the end of 2022. It will then rise to 2.8% in 2023 and then remain at this level in 2024. This, the rate-setting Committee noted, would begin to weigh on economic growth, something that has become a growing concern throughout Wall Street.

The gross domestic product (GDP) growth rate is seen sliding to 2.8% this year, below the organization's previous projection of 4%. Inflation is predicted to average 4.3% at the end of this year and then slow to 2.7% next year and 2.3% in 2024. Humph. Where have we seen optimistic inflation projections before? Powell is ostensibly preparing for the Fed to miss the mark again, alluding to Russia’s invasion of Ukraine and its effects on the global supply chain crisis.

When it comes to the more than $9 trillion balance sheet, Powell confirmed to reporters that tapering plans would be unveiled "at a coming meeting." Some market observers think the Fed could announce its intentions to unwinding assets at the May 4 get-together. And, remember, it only just finished its pandemic-era asset purchases this month.

“The most likely outcome is still that the Fed engineers a gradual slowing in inflation over the next couple of years while growth continues, although with a few bumps along the way. But if the central bank makes a mistake and raises rates too quickly, the U.S. economy could fall into recession in late 2022 or in 2023,” said Gus Faucher, chief economist at PNC Financial, in a note.

Not everyone was pleased with the monthly powwow. James Bullard, the St. Louis Fed Bank President, was the lone dissent vote because he wanted the Fed to go scorched-earth on rampant inflation by raising rates a lot higher. He issued a statement on Mar. 18, demanding that the Fed bring the benchmark short-term rate to above 3% by the end of the year, otherwise the monetary policy body risks the post-crisis economy and could erode the century-old entity’s credibility.

“U.S. monetary policy has been unwittingly easing further because inflation has risen sharply while the policy rate has remained very low, pushing short-term real interest rates lower. The Committee will have to move quickly to address this situation or risk losing credibility on its inflation target,” he wrote, adding that the Fed needs to emulate the policymaking of the 1990s that stopped inflation and led to a considerable economic expansion.

Fed Governor Christopher Waller has also hopped on the aggressive bandwagon, proposing half-point rate hikes to quiet down “raging inflation.”

But while it is unlikely that Powell will mirror the inflation-buster Paul Volcker in the 1980s, the U.S. economy is on the brink of stagnant economic growth. The Atlanta Fed Bank GDPNow first-quarter estimate suggests 1.3% growth, and the Philadelphia Fed Bank's median prognostication is 1.8%. Some Wall Street analysts are projecting a recession, although there is a debate as to whether it will be brief or prolonged.

Omnipotent and Incompetent

The Federal Reserve is an apotheosis inside the global economy, monetary order, and financial system. It is an almighty, omnipotent creature from the black lagoon. Despite possessing God-like power, the US central bank has gotten nearly everything wrong since the early days of the pandemic. One could make the argument that it got the 2019 rate cut wrong, but that is a separate discussion for another day. From inflation being transitory to fueling the everything bubblemania, the institution has now trapped itself in a corner. Will the Fed heed the advice of one of its own and accelerate tightening, or will the central bank fear destroying growth prospects? It goes to show that even the most inept people can have keys to the kingdom. Forget Bidenflation – this is Powellflation.

~ Read more from Andrew Moran.