In a short period of shock, a crowd of economists and Fed experts began arguing that the central bank is now moving too aggressively to slow the economy — and over-correct past mistakes. Many critics backed the Fed’s decisions only last year, when officials held off on raising interest rates to allow the labor market to recover as much as possible even with high inflation.
Opposition gained new ground as analysts cut growth forecasts, the stock market crash and the delayed effects of an earlier interest rate hike by the Federal Reserve have yet to spread to the economy. Meanwhile, many of the world’s major central banks are simultaneously raising interest rates, In a risky economic experiment that has not been tried before.
“Steering the economy is like steering a big ship. It moves very slowly, and once you get the leadership back to normal, it just keeps working,” said Greg Mankiw, a Harvard economist and former chair of the Council of Economic Advisers during the George W. Bush administration. join A growing group of economists from both the left and the right argue that the Fed is clamping down on the economy too hard. Mankiw said the Fed has clearly not been in this position before, but “it’s easy for a novice to overreact, and then if you turn too much the other way, it could be a source of instability rather than stability.”
Central banks seem to be facing fresh winds by the week. a United Nations agencyand the WTO They all warned of a global slowdown as interest rates rise in major economies from Australia to Europe. International Monetary Fund on Tuesday lowered Its outlook for global growth, saying in a new report that “the worst is yet to come, and for many people 2023 will feel like a recession.” The coalition of oil-producing countries led by Russia and Saudi Arabia announced last week They will cut oil production, a move that will soon lead to higher gas prices. The decision came as President Biden and Western leaders tried to keep oil flowing at low prices as part of their response to Russia’s invasion of Ukraine.
The Fed has lower expectations As for economic growth for 2022, and no one knows how long it will last before the sluggish effects of higher interest rates are fully impacted.
“The Fed has tightened policy very hard to lower inflation, and US tightening is being amplified by simultaneous foreign tightening,” Fed Vice Chairman Lyle Brainard He said In a letter on Monday. “We’re starting to see the effects in some areas, but it will take some time for the cumulative tightening of the transition across the economy to bring down inflation.”
major stock indices slipped With Wall Street panicking over the Fed’s promise of more rate hikes, it fell nearly 3 percentage points on Friday after the latest jobs report showed the labor market It still hasn’t cooled down significantly Another sign that the Fed is unlikely to back down soon. Major indexes slipped slightly on Monday as well, with the Nasdaq Composite reaching its lowest level in two years, weighed down by a plunge in technology stocks.
However, unlike other parts of the economy, central bankers Not specifically aimed at calming the stock market. In recent weeks, officials have said that wild fluctuations are not for them Decision making. Stocks have been volatile in response to nearly every economic indicator.
“I have read some speculation recently that financial stability concerns could lead to [Fed’s policy committee] Federal Reserve Governor Christopher Waller said in a speech last week. “Let me make it clear that this is not something I’m considering or think is a very likely development.”
Entering the last phase of the year, the Fed’s drive to cut inflation could undermine the economy’s remaining strengths. Labor market Cooling in certain areas But it has generally remained resilient with tighter monetary policy, with employers adding a solid 263,000 jobs in September. The number of job vacancies fell by more than 1 million in August, an encouraging sign for Fed officials aiming to bring the number of job openings more in line with the number of people looking for work. So far, there have been approximately two jobs for every job seeker, although that number is slowly declining. Consumer spending and personal income rose in August, consumer confidence rebounded as gas prices fell the summer.
But Fed leaders say they are focused too heavily on inflation and see no reason to stop raising interest rates just yet. Central bankers are expected to raise interest rates by 0.75 percentage points at their meeting in November and 50 percentage points in December.
Officials say their decisions will be based on data. The September jobs report, which showed continued growth, is not expected to change their plans, as the labor market remains flounder and job opportunities remain high. New federal inflation data coming out on Thursday may influence those decisions, although officials say they need to see months of clear and consistent progress on lower prices. This real test is elusive.
“Reports over the past few months have shown that persistently high inflation continues, while the labor market has remained robust,” Fed Governor Lisa Cook said. Speech Last week, before the September jobs report was released. “Being dependent on the data, I have revised my assessment of persistently high inflation.” She noted that she “fully supported” the Fed’s decision to push interest rates higher earlier this year.
The Fed has kept interest rates near zero for most of the pandemic, even as inflation is rising. Since March, it has been in a hurry to get interest rates into “restricted territory,” actively slowing the economy. the bank Interest rates rose 0.75 percentage points for the third time in September, Have a reference interest rate between 3 percent and 3.25 percent, higher than it has been since 2008.
But raising prices does not bring immediate clarity. This reality has drawn growing criticism from liberal lawmakers and Fed watchers who say the fight against inflation ultimately involves… wrong target. Price increases end demand in the economy, but they do nothing to fix supply-side problems, such as lack of oil and gas, affordable apartments or new car chips.
Some inflation may come down on its own as supply chains become clearer and the pandemic continues to ebb. But after months of central banks With soaring demand, critics say, companies can stop hiring and lay off employees long before rental costs, gas prices or new cars drop.
“This idea that we address global supply shocks with domestic interest rate policy is likely not going to be out of date,” said Lindsey Owens, CEO of Groundworks Collaborative, a progressive group focused on economic policy.
Owens compared the risks associated with the Fed’s approach to a frog sitting in a pot of gradually boiling water: “You don’t know you’re cooked until it’s done,” she said.
The Fed’s tools may be limited, but its job is both To maintain price stability and promote a strong labor market. Officials say if they don’t raise interest rates enough now, inflation will get worse and force the central bank to act more aggressively later. The bank also appears to be calculating that the job market has been very strong, and it can afford to bring rates back to normal.
Officials warned of economic hardship ahead. This means that even once bubbles appear – in the stock market or in people’s pockets – they will not pivot.
“It’s too early to make that call,” said Douglas Holtz-Eaken, president of the Conservative American Labor Forum and former director of the Congressional Budget Office. “What you hear are voices from Wall Street living on easy money for a decade. And I’m sorry, times have changed. My message is: Deal with it.”