Commentary on Political Economy

Wednesday 30 November 2022


Fed Chair Powell should make it clear: More rate hikes are needed

Fed Chair Jerome H. Powell on Nov. 2. (Elizabeth Frantz/Reuters)
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The Federal Reserve was created to be mostly independent of politics so that it could make difficult — and sometimes unpopular — decisions for the health of the U.S. economy. This is one of those moments for Fed Chair Jerome H. Powell and his colleagues; their challenge is to do what is necessary to tame the inflation threat, even if it has political consequences and causes a recession.

Mr. Powell has rightly pointed out that the risks of not doing enough to stop inflation are far worse than overdoing it on the rate hikes. He should reiterate that message again as he speaks Wednesday at the Brookings Institution.

Inflation remains stubbornly high. While there are early signs that it has peaked, it is too early to say the danger is over. The most closely watched inflation gauge — the consumer price index — was up 7.7 percent in October. That’s down from the peak of 9.1 percent in June, but it remains substantially above the Fed’s 2 percent target. It’s encouraging that prices are finally moderating, and in some cases falling, for many items that skyrocketed during the pandemic or because of the war in Ukraine. They include used cars, airfares, chicken and gas. But many factors could send energy prices shooting up again, and the rise in services inflation in recent months could be even harder to stop.

Politicians, especially on the left, are demanding that Mr. Powell stop raising interest rates. They fear a spike in layoffs if the Fed takes interest rates even higher in an effort to curb consumer spending. Wall Street reinforces that call, sending stocks higher every time there’s a hint that rate hikes are soon to cease.

Editorial | To beat inflation, the Fed might have to trigger a recession

No one wants a recession. Many families and business owners still carry the scars of mass layoffs from the Great Recession and the pandemic. But the longer inflation stays high, the harder it will be to get it back under control, necessitating even more layoffs and pain. Already, many daily necessities are becoming unaffordable for lower-income Americans. If inflation doesn’t come down soon, it will hamper growth and job prospects for years to come.

History shows that inflation often comes as a series of shocks. Taming it is not just a one-off battle. “Keeping inflation low over the coming years will be as important as the initial job of bringing it down to target,” Ben May of Oxford Economics said in a note this week.

Fed leaders have signaled in recent weeks that they would like to slow the pace of rate hikes. Interest rates started the year at basically zero and are now near 4 percent. At the Fed’s December meeting, central bankers will likely endorse a half-point increase, and they have opened the door to smaller quarter-point increases next year. But easing up — a little — on rate hikes is not the same as stopping them altogether.

Editorial | Congress and Biden have to help the Fed fight inflation

The United States is not in a recession now. Many economic barometers still look strong, especially employment. This is a moment for the Fed to be decisive: More rate hikes are needed to subdue inflation.

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