Federal Reserve needs to stop rate hikes now
The Federal Reserve needs to now stop interest rate hikes because of the notorious time lag of monetary policy.
On Wednesday, Fed Chair Jerome Powell announced the US central bank would skip a rate hike this month, as was broadly expected, but will resume after this pause.
Indeed, as I was quoted by CBS, Value Walk, Investor Ideas, Business Today and News Finale, amongst other media, following 15 months and ten consecutive rate rises in a bid to curb soaring inflation, the Federal Reserve this week confirmed it would not be increasing rates in the world’s largest economy in June.
This shows that, finally, the fight to curtail skyrocketing prices is at last being won.
Of course, this is good news for households, businesses and those financial assets impacted by the most aggressive monetary policy since the 1980s.
Yet the Fed isn’t done yet. The pause in June is just a ‘skip’ as we thought.
Core and headline inflation is edging down, but the core still remains comparatively high. The 2% target is still a long way away. And the Fed is focused on the tightness of the labour market, as unemployment remains near all-time lows despite the lengthy inflation fight.
Consequently, I wouldn’t be at all surprised if rates were increased to 6% by the end of the year.
Yet, the fight against inflation is being won, so this is the time for the Fed to stop, not pause, rate hikes.
The time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy.
We’re now starting to see the drag effects on the US economy, with households and businesses becoming considerably more prudent.
In addition, investors are becoming more and more concerned that additional hikes could steer the US economy into a major recession.
However, naturally, the Fed will argue it needs to keep increasing rates to revert inflation back to target.
But it needs to make sure the tight labour market doesn’t cloud the bigger picture and continue to overdo the hikes, which would lead to a deeper, longer recession.
Being the world’s largest economy, this would clearly have a massively negative effect on the global economy.
As such, the case for stopping rate rises now is undeniable.