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Federal Reserve Raises Rates By 75 Basis Points; Is Fed Chairman Jerome Powell Powerless To Prevent A Stagflationary Depression?

July 27th, 2022

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

Jerome Powell, Federal Reserve chairman and Fed officials unanimously agreed to hike rates by three quarters  of one percent (75 basis points), bringing rates to between 2.25 and 2.5 %. This is still very low considering the last report from the U.S. Labor Department, which tabulated inflation in the United States at 9.1%. The Fed in effect admitted this by indicating further hikes are likely.

Having missed  the train repeatedly by claiming inflation was only transitory, Powell and his minions are compelled to bring up rates in desperation as inflation domestically and internationally spirals almost out of control. This is where America’s central bank faces a conundrum. As weak economic data points to a recession in the U.S. economy, there is a growing chorus urging restraint by the Fed,  as higher rates will further  enable recessionary forces. Bu they are too late.

Yes, higher Fed rates will create a fiscal drag on the domestic economy. But having been so wrong in its previously unjustified lack of concern about inflation, failure to bring rates much higher will not prevent a recession; it will merely guarantee stagflation-a recession with high inflation.

For the Fed rate hikes to have any effect, they will need to go much higher, at the very least  in excess of 5 %. Unfortunately, current global inflationary pressures are not only derived by  demand . There is a supply shock, independent from demand forces and unimpeded by rate hikes enacted by central banks. The supply shock was initially brought on by Covid lookdowns, which created supply bottlenecks. Now, added to this is the Russia-Ukraine war and the resulting sanctions and blockades. These forces are unpredictable but will likely be enduring. This ensures that the coming recession will be  both severe and sustained, concomitant with elevated inflation. In  essence, a stagflationary depression is threatening the global economy, and all central banks, including the Federal Reserve, can do no more than nibble at the edges.

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