Global Economic Crisis

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.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The U.S. Labor Department   released its latest CPI  data On July 13, indicating that in the previous month inflation in the United States had surged to 9.1 %. This is the highest rate for inflation in the U.S. in more than four decades and harkens back to the stagflation that ravaged the American and global economy during the presidency of Jimmy Carter.

The elevated rate of inflation defied the prediction of many economists who have largely engaged in wishful thinking rather than macroeconomic analysis. With inflation not only remaining high but continuing to accelerate, it is very likely that inflation the United States is about to enter double-digit territory, if it has not already done so.

It is very likely that organized labor will soon make demands during collective bargaining for wage increases  vastly higher than what has occurred in several decades. That in turn will unleash powerful new inflationary pressure, adding to what is already impacting price instability, including supply chain bottlenecks aggravated by Covid-induced lockdowns and geopolitical tensions.

There are some economists and investors who have been hoping  that the Federal Reserve would defy economic logic and greatly moderate its planned rate increases. However, with inflation surging at unprecedented rates, and the sovereign powerless to arrest its momentum with its feeble fiscal interventions, it is almost certain that the Fed will have no choice but to rapidly raise rates, abandoning once and for all it s near zero rate policy. The next rate increase may very well be 75 basis points.

The latest data and the likely policy response from the Federal Reserve further solidifies the likelihood of prolonged global economic stagflation, and more likely than not, a global economic depression.