In the last week of March 2022, the Federal Reserve revealed a regime change in their policy. The Fed moved from balancing jobs and inflation and being patient to a new policy of aggressively raising rates in order to fight inflation, regardless of its impact on the economy.
On March 16, 2022 the Fed raised rates for the first time in several years 25bps. The move was well broadcast and expected by markets for many months. Many critics of the Fed have complained the Fed has waited too long to raise rates. In 2020 the Fed lowered rates and engaged in massive quantitative easing (“QE”) in order to pull the economy out of the recession that resulted from the COVID shutdown.
On Monday March 20, 2022, Chair Powell appeared at the NABE (National Association for Business Economics) conference; his comments revealed a clear change in priorities at the Fed, and some insight to policy going forward. (1) In his statement he shares that “Supply chains are healing, but we are now seeing new COVID related supply disruption from China. The healing will come in time as the world settles into a new normal, but the timing and scope of that relief are highly uncertain. In the meantime, the Fed will be focused on trying to reduce price pressures.
As the magnitude and persistence of inflation became more clear at the end of 2021, the FOMC pivoted to less accommodative monetary policy. I believe these policy actions, and those to come, will help bring inflation down to 2% over the next 3 years.“Continue reading ““The Fed is going to break things…””