Fed smash! | opinion
Monetary policy tightening slows inflation by pulling demand down so that it no longer exceeds supply. How it does this is not subtle. It makes credit more expensive, so companies invest less and consumers spend less. It makes asset prices fall and asset markets less liquid, so companies and households become poorer and less inclined to spend. It makes people not get hired and it makes people get fired. It does this quite indiscriminately. It is not a scalpel, it is a sledgehammer.
We don’t seek to put people out of work [but] we also think you really cannot have the kind of labour market we want without price stability . . .With yesterday’s 75 basis point interest rate increase, the Fed is tightening as fast as it thinks it can, even if that means lay-offs. As Capital Economics pointed out, the central bank cut this sentence from its pre-meeting statement :
In absolute terms the projections still look rosy. If unemployment peaks at 4 per cent or so next year, that will be a remarkably good outcome. But the point, for purposes of assessing the Fed’s current approach, is not so much the level as the direction and pace of change. It’s a similar story with growth of gross domestic product:
Because the 75bp increase was telegraphed on Monday, markets didn’t move much in response to the official announcement. What did move markets, though, was when Powell said the next meeting’s rate increase would not necessarily be 75bp but could be 50bp , depending on the data.
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