Federal Reserve rate hikes could be worse for the economy than inflation

Last week, the Federal Reserve announced its second consecutive monthly interest rate hike. 0.75% to tackle inflation, This is the biggest step of this kind since the early 1980sWhen it intentionally contributed to a massive recession and crushed the American labor movement to fight price hikes.

A day after the recent rate hike, the Commerce Department released GDP figures for the second quarter of 2022. According to this preliminary estimate, the US economy shrank 0.9% over that period, after contracting 1.6% in the first quarter. Economic shrinkage is a traditional definition of recession for two consecutive quarters (although many economists argue that the economy has a number of unusual aspects that get out of recessionat least for now).

It is now clear that the Fed is getting a lot more aggressive with its rate hikes. Current state of inflation (reaching a .) Annual rate of 9.1% in June) is largely due to factors beyond the Fed’s control, and these staggering increases have already plunged the US economy into recession. But if it bounces back easily, there’s still a good chance that inflation will calm down on its own.

It is now clear that the Fed is getting a lot more aggressive with its rate hikes.

as This chart from The Washington Post Broadly, the source of inflation has changed significantly over the previous year. Currently, it is mainly coming from three main sources: energy, housing and groceries. Rising costs in these areas are not the reason interest rates will be affected.

First, the COVID-19 pandemic caused a massive disruption in economic output around the world, which would take years to recover. Those disruptions are ongoing in Earth, China’s largest manufacturing country, thanks to its strategy to suppress the spread of the virus. strict lockdown instead of this mass vaccination,

Second, there is Russia’s invasion of Ukraine. The sanctions imposed on Russia in retaliation, and its choice to punish Western Europe by cutting natural gas supplies, have significantly disrupted global supplies of energy and food. Russia is a major producer of oil and gas, and both countries are biggest. out of grain exporters in the world. Rising fuel costs then lead to a knock-on price hike.

Incidentally, this is why inflation has been as bad or worse in India the rest of the worldWhere most governments did not implement a major stimulus like the US rescue plan in March 2021. For example, inflation was observed in the eurozone 8.9% in JulyThanks in large part to the boom in energy prices.

Third, the Great Recession continues to hurt. as people Employment America Consistently pointing out, after the 2008 economic downturn, inadequate stimulus prompted a decade-long economic stagnation. due to which a compatible fall in investment, especially in housing. When the economy returned in 2021 thanks to pandemic relief packages, the U.S. lack of new homes, Meanwhile, American businesses had gotten used to running their operations as lean as possible and were completely overwhelmed by demand.

It follows that there are two basic strategies to tackle inflation. Either we can manufacture enough goods and services to meet demand, or we can make the American people poor so that they can no longer afford them. The latter strategy is clearly what the Fed is doing. Higher interest rates make it more expensive for people to mortgage homes and for businesses to invest, which leads to mass layoffs, and thus lower expenses and lower price increases. And it doesn’t just happen in the US: the developing world relies heavily on dollar credit, and certainly across Latin America, Africa, and Asia, the Fed’s hikes are seen as likely. cut hard in poor economies.

Make no mistake, it may “work” in terms of reining in prices, although it may take several years. When then-Fed Chairman Paul Volcker strangled the economy in the 1980s, he did manner of speaking that “the standard of living of the average American has declined.” Inflation eventually subsided – but today, it will come at the cost of not only prolonged high unemployment, but also Sustaining the Post-2008 Investment Drought This is at the root of half of our current price problems in the first place.

Other businesses that have invested in new capacity are now at risk of bankruptcy from idle facilities or the cost of unsold inventory.

On the rent question, the US isn’t even close to building enough homes for the post-2008 construction collapse – but now thanks to the Fed, house sale And new home start are falling. John Maynard as Keynes biographer Zach Carter told in a recent speech: “Ask yourself: If the goal is low rent, should we a) build more houses, or b) indiscriminately fire large numbers of people out of their jobs? The latter is the serious contention of this newly revived austerity brigade. ” Other businesses that have invested in new capacity are now at risk of bankruptcy from idle facilities or the cost of unsold inventory.

Fortunately, there are reasons to think that the worst of supply problems are already behind us. prices of wheat, Maize, aluminum, Oil And most other objects have already fallen significantly from their post-attack peak. Ukraine and Russia A UN-broker agreement reached So that the consignment of grain can proceed. in the US labor market obviously soft in the past few months, and the salaries are not keeping up with inflation – Unfortunate for workers, sure, but it does mean that there is no spiral of wage growth, driving price increases. If the Fed just balks for a few more months, there’s a good chance prices will calm down without the need for a recession, sparing both businesses and workers alike from undue hardship.

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