In a bit of whiplash, a buildup of economists and Fed experts have started arguing that the central bank is now moving too forcefully to slow the economy — and overcorrecting for past mistakes. Many of the critics supported the Fed’s decisions just last year, when officials held off on raising interest rates to let the labor market recover as much as possible even while inflation climbed.
The pushback has gained new ground as analysts slash forecasts for growth, the stock market tumbles and the lagging effects of the Fed’s earlier rate hikes have yet to filter through the economy. Meanwhile, many of the world’s major central banks are raising rates simultaneously, in a precarious economic experiment that has never been tried before.
“Steering the economy is like steering a large ship. It moves very slowly, and once you return the helm to normal, it keeps going,” said Greg Mankiw, an economist at Harvard University and former chair of the Council of Economic Advisers during the George W. Bush administration. Mankiw has joined a growing group of economists from the left and the right arguing that the Fed is braking the economy too hard. Mankiw said the Fed has obviously never been in this position before, but “it’s easy for a novice to overreact, and then if you turn too much in the other direction, it can be a source of instability rather than stability.”
Central banks seem to face new head winds by the week. A United Nations agencyand the World Trade Organization have all warned of a global slowdown as interest rates rise in major economies from Australia to Europe. The International Monetary Fund on Tuesday downgraded its global growth forecasts, saying in a new report that “the worst is yet to come, and for many people 2023 will feel like a recession.” A coalition of oil-producing nations led by Russia and Saudi Arabia announced last week that they would slash oil production, a move that will soon send gas back prices up. That decision came as President Biden and Western leaders have tried to keep oil flowing at lower prices as part of their response to Russia’s invasion of Ukraine.
The Fed has slashed expectations for 2022 economic growth, and no one knows how long it will be before the slow effects of rate hikes will fully hit.
“The Federal Reserve has tightened policy strongly to bring inflation down, and U.S. tightening is being amplified by concurrent foreign tightening,” Fed Vice Chair Lael Brainard said in a speech Monday. “We are starting to see the effects in some areas, but it will take some time for the cumulative tightening to transmit throughout the economy and to bring inflation down.”
Major stock indexes have been sliding as Wall Street panics over the Fed’s promise of more rate hikes, and plunged nearly 3 percentage points Friday after the latest jobs report showed the labor market still hasn’t cooled off significantly — yet another sign that the Fed isn’t likely to ease up soon. Major indexes were down slightly Monday, too, with the Nasdaq composite hitting its lowest level in two years, dragged by falling tech stocks.
Still, unlike other parts of the economy, central bankers aren’t specifically aiming to cool off the stock market. In recent weeks, officials have said the wild swings don’t shape their decision-making. Stocks have been volatile in response to almost every economic indicator.
“I’ve read some speculation recently that financial stability concerns could possibly lead the [Fed’s policy committee] to slow rate increases or halt them earlier than expected,” Fed governor Christopher Waller said in a speech last week. “Let me be clear that this is not something I’m considering or believe to be a very likely development.”
Going into the year’s final stretch, the Fed’s campaign to slash inflation could undermine the economy’s remaining strong points. The job market is cooling in certain areas but has generally stayed resilient through tighter monetary policy, with employers adding a solid 263,000 jobs in September. The number of job openings plunged by more than 1 million in August, an encouraging sign for Fed officials aiming to bring the number of vacancies more in line with the number of people seeking work. Up to now, there have been about two openings for each job seeker, though that figure is slowly easing. Consumer spending and personal incomes both rose in August, and consumer confidence recovered as gas prices came down through the summer.
But Fed leaders say they are laser-focused on inflation and see no reason to stop pushing rates up yet. Central bankers are expected to raise rates by .75 percentage points at their November meeting, and by .50 percentage points in December.
Officials say their decisions will depend on the data. The September jobs report, which showed continued growth, isn’t expected to change their plans, since the labor market is still churning and job openings remain high. New federal inflation data to be released on Thursday could influence those decisions, though officials say they need to see months of clear and consistent progress on falling prices. That litmus test is far from being met.
“Reports over the past few months have shown high inflation to be stubbornly persistent, while the labor market has remained strong,” Fed governor Lisa Cook said in a speech last week, before the September jobs report came out. “Being data-dependent, I have revised up my assessment of the persistence of high inflation.” She noted that she “fully supported” the Fed’s decision to push interest rates up higher earlier this year.
The Fed held rates near zero for much of the pandemic, even as inflation climbed. Since March, it has been in a rush to get rates into “restrictive territory,” where they actively slow down the economy. The bank hiked rates by 0.75 percentage points for the third time in September, getting the benchmark interest rate between 3 percent and 3.25 percent, higher than it’s been since 2008.
But rate hikes don’t bring immediate clarity. That reality has inspired growing criticism from liberal lawmakers and Fed watchers who say the inflation fight ultimately involves the wrong target. Rate hikes snuff out demand in the economy, but they do nothing to fix supply-side issues, like shortages of oil and gas, affordable apartments or chips for new cars.
Some inflation may come down on its own as supply chains clear up and the pandemic continues to ease. But after months of central banks pummeling demand, businesses could stop hiring and lay people off well before costs for rent or gas prices or new cars come down, critics say.
“This idea that we take on global supply shocks with domestic interest rate policy is probably not going to age well,” said Lindsay Owens, executive director of the Groundwork Collaborative, a progressive group focusing on economic policy.
Owens compared the risks tied to the Fed’s approach to a frog that sits in a pot of gradually boiling water: “You don’t know you’re cooked until it’s over,” she said.
The Fed’s tools may be limited, but its job is both to keep prices stable and foster a strong job market. Officials say that if they don’t raise rates enough now, inflation will only worsen and force the central bank to act more aggressively later on. The bank also seems to be calculating that the job market has been so strong, it can bear the costs of getting prices back to normal.
Officials have warned of economic pain to come. And that means that even once it bubbles up — in the stock market or peoples’ pocketbooks — they won’t pivot.
“It’s way too soon to make that call,” said Douglas Holtz-Eakin, president of the conservative American Action Forum and a former director of the Congressional Budget Office. “What you’re hearing are voices from Wall Street that have been living on easy money for a decade. And I’m sorry, times have changed. My message is: Deal with it.”
Read More:To fight inflation, Fed may be moving too aggressively on rate hikes
2022-10-11 13:00:00
