The Fed’s firefight with inflation finally begins: Morning Brief

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Wednesday, March 16, 2022

Inflation is raging at a pace not seen in 40 years, making it a near certainty that the Federal Reserve will raise interest rates at the conclusion of its policy-setting meeting this afternoon.

How do we know? Because Fed Chairman Jerome Powell said so.

“I’m inclined to propose and support a 25 basis point rate hike,” he told Congress on March 2.

But a 0.25% bump in short-term borrowing costs is just the first step in slowing the rapid pace of price increases observed by Americans at the mall, the grocery store, and the gas pump.

Those inside the Fed itself estimate that interest rates below 2.5% are still stimulative to the economy.

“The Fed has a long, long runway to go before they would be entering restrictive territory with respect to the economy — let alone trying to combat inflation,” Kevin Flanagan, WisdomTree head of fixed income strategy, told Yahoo Finance on Tuesday.

The problem is that the Fed is between the rock of a war in Ukraine, the hard place of the world’s second largest economy facing more shutdowns, and, uh, another rock of the historical tendency for the Fed to induce recessions during previous rate hike cycles. Those risks are a big reason why the Fed may only move by 0.25% today.

The Fed’s next steps after today’s initial bump will be critical. With inflation clearly not “transitory,” the Fed may have to lean on some 0.50% hikes (that hasn’t happened since 2000) and a reduction in its $9 trillion balance sheet (that’s never been attempted at this scale) if price increases get even worse.

Not all of this is bad. Easy money policies thus far have supported a strong labor market recovery. Despite an Omicron wave that ripped through the U.S. in the winter, the economy added 3.5 million jobs in the last six months. Many jobs reports, like the most recent February print, blew through Wall Street estimates.

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As the Fed makes its first interest rate increase since 2018, remember the central bank’s dual mandates: maximum employment and stable prices.

Strong job gains likely marks “mission accomplished” on the first mandate. But in the words of pop star JoJo, “It’s just too little too late” for the Fed on its other mandate of inflation.

Raising rates today would be the most substantial acknowledgement to date that its pandemic-era policy of aggressive money printing is no longer needed — and that it is time to “Get out (leave) right now” [from JoJo’s debut single, yes I’m a big fan].

The Fed decision is due out at 2:00 p.m. ET, when the Federal Open Market Committee will release its policy statement, alongside economic projections showing forecasts for inflation and paths for future interest rate moves. Powell will then answer questions from the press shortly after.

Do you have suggestions for what to ask the central bank chief? Shoot me an email: [email protected]

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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