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Fed rush to catch up with inflation increases US recession risk

The Federal Reserve is at risk of making policy mistakes and putting the economy into recession as it faces decades of high inflation, proving more sustainable and widespread inflation than policymakers expected. Is increasing.
After keeping interest rates near zero since the pandemic began, Federal Reserve Chair Jerome Powell and his colleagues are ready to launch a credit crunch campaign next month.
The danger is that inflation is well above the target of 2%, putting pressure on the Fed to overdo it. Super-expandable monetary policy.
At the same time, fiscal policy also acts as a damper for growth. Soaring prices for everything from gasoline to rent have weakened support for President Joe Biden’s efforts to rebuild the economy by strengthening social investment, reducing the number of polls.
Economists on both sides of the political spectrum believe that the risk of a recession is increased. Former Fed Governor Lawrence Lindsay, who worked for the White House under Republican President George W. Bush, has shown a possible recession of more than 50% by the end of next year, caused by the collapse of Wall Street. ..
“If you’re wrong in one direction and painfully wrong, you’ll have to lift something too heavy to go in the other direction,” said Lindsey, who now heads his own consulting firm. What he sees is that the Fed has been slow to recognize and respond to the emerging inflation problem.
Former Treasury Secretary and Democratic Lawrence Summers agreed. “The Fed has made it possible to put itself far behind in the fight against inflation,” said Summers, a paid TV contributor to Bloomberg. “The risk of a recession starting in the next 30 months is certainly 50%.”
Money market traders are betting on the Fed’s increase in percentage points for about six quarters this year. In addition to these increases, the Fed’s balance sheet has not yet been identified, but is now at $ 8.9 trillion. It will deprive the financial system of liquidity-potentially volatile bond and stock markets.
“In the stock market, I don’t think we’ve priced a balance sheet tightening at all,” said Gina Martin Adams, chief equity market strategist at Bloomberg Intelligence. She said, “We have hardly started talking about it.”
Powell is confident that wise monetary policy tightening, coupled with alleviating supply chain bottlenecks and shrinking the federal pandemic bailout program, will help curb inflation without hindering economic expansion.
However, he admits he is amazed at the potential for price pressure and vows that the Fed will do what it needs to do to prevent rising inflation from being incorporated into the economy.
The Fed’s surge isn’t just about how much inflation has accelerated. Consumer prices surged 7.5% year-on-year in January, the fastest in 40 years.
It is also the breadth of price increases.
According to Bloomberg Economics calculations, about 90% of the components of the consumer price index are above 2%. This is the Fed’s official inflation target. Former Fed David Wilcox, director of US economic research at Bloomberg Economics, said this was “a source of some major concern.” “It causes more inflationary psychology to take hold.”
As a sign of growing inflationary pressure, home and car insurers Allstate Corp have raised rates by an average of 7.1% in 25 states and are planning to raise them further.
“We’re moving at a very fast pace in other states,” Glen Shapiro, senior executive at Allstate, told Wall Street analysts at a conference call on February 3. “And in some cases, as we get new data and new trends, the same situation happens again with increasing rates.”
Powell also points out a notable increase in wages.
“We are paying attention to the risk that sustained growth in real wages beyond productivity could put upward pressure on inflation,” he told reporters on January 26. ..
The tight labor market (4%) has unemployment below the levels seen in many of the previous expansions, but employers fill millions of jobs and bid for wages to retain workers. I came to do it. Last year, compensation costs surged the most in 20 years.
“We expect wage pressure to continue this year,” McDonald’s CEO Chris Kempczinski said in a statement on January 27. “Sure, we’re thinking about pricing, so we’re thinking about how to set pricing that can predict it.”
The problem with Powell and the Fed is that after last year’s growth was recorded the fastest since 1984, central banks will slow down the economy and step up policies to curb inflation.
“The Fed is heading for a slowdown,” said Sarah House, senior economist at Wells Fargo Securities. “It shows some risks around if they are too fast.”



http://www.gulf-times.com/story/709780/Fed-rush-to-catch-up-on-inflation-raises-recession Fed rush to catch up with inflation increases US recession risk

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