The Fed, after raising interest rates by 75 basis points, does so again in smaller steps in December and February. johnsfoley explains how if inflation doesn’t go back to 2%, and instead sticks somewhere higher, things could start to get scary:
For a central bank, the nightmare scenario is one where inflation subsides to a level above its target and then plateaus. Unlike now, rate-setters’ path would be much less clear. One option is to keep tightening. But each notch of rising rates would add stress for borrowers, and push equity markets lower. The Fed doesn’t technically have to care about that, but it could become a political issue if the paper wealth of America’s affluent goes up in smoke.
The alternative would be to move the goalposts. The idea that prices should rise at roughly 2% is more art than science: It spread, almost virally, after being adopted by the Reserve Bank of New Zealand in 1990, and was officiallyin 2012. Scrapping the target would look like an admission that the Fed has failed. Rate-setters fret that consumers’ expectations might become, in central banker-speak, “unanchored,” leading workers to demand ever-higher wages, fueling faster price growth.
Powell and his fellow governors may yet avoid this dilemma. Consumers, whose behavior has proved hard to predict, may retrench as their savings deplete. Rate hikes could trigger a recession, a state that’s painful but has tended to bring inflation down quickly in the past. That won’t win Powell many friends, but faced with the specter of an economy that won’t bend to the central bank’s will, he’d probably rather be effective than popular.The Federal Reserve raised its targeted range for U.S.
The new range would be between 3.75% and 4%, the highest level since 2008. The Fed’s monetary policy committee said it expected further rate-hikes would be appropriate, but in a change from previous statements, it added that the committee will take into account the cumulative effect of monetary tightening.
Consumer prices rose 8.2% in September, year-on-year, as measured broadly by the Bureau of Labor Statistics without adjusting for seasonal effects.Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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