Power & Market

Powell’s Predictions

Following the first interest rate increase in several years, Federal Reserve Chair Jerome Powell provided some interesting predictions for the year ahead. Starting with his thoughts on the likelihood of a recession:

…I would start by saying that, in my view, the probability of a recession within the next year is not particularly elevated.

He believes that because aggregate demand, the labor market, job growth, and household/business balance sheets are all strong, the economy “will be able to flourish” with less accommodative monetary policy.

When asked about (price) inflation for the rest of the year, he mentioned how the Ukraine crisis should add to it, but thinks inflation will go down later this year, confidently saying he expects inflation to be “lower than last year.”

He was then asked how much he expects inflation to come down as a direct result of the Fed’s actions, in which he responded how other factors besides monetary policy, like supply chain issues, affect inflation. He gave the following dates:

You know, I think monetary policy starts to bite on inflation and on growth, with a lag, of course. And so you would see that more in ‘23 and ‘24.

His thoughts on inflation and interest rates were made clear through the following question, regarding how the average American should understand inflation:

How is the 25 basis point hike today and then the signaling on future Fed policy going to address the inflation that they’re feeling at the stores on a daily basis?

Powell first mentioned how middle-income persons can handle more inflation, in his own words:

…I mean, we’ve all seen charts that show, if you’re a middle-income person, you’ve got room to absorb some inflation.

Then provided a formal response:

You asked about rates. So the way that works I would explain is, as we raise interest rates, that should gradually slow down demand for the interest sensitive parts of the economy. And so what we would see is demand slowing down but just enough so that it’s a better match with supply. And that brings -- that will bring inflation down over time.

While not said explicitly, his plan indicates that by raising rates on home mortgages and quite literally every rate sensitive loan product, including the expense on US Government debt, should bring down the prices of everyday household items.

As noted in the previous article about raising rates to fight inflation, it seems strange there would ever exist an inflation problem in the world, or at least a problem in America, if raising rates to lower prices worked as easily as it has been portrayed by the central bank.

The path of monetary tightening continues with more details on balance sheet reduction to come in May, followed by continual rate hikes. With the raising of rates coupled with high inflation readings, the comparison between now and the 1980’s continues. It was reminded to Powell that the last time CPI inflation was this high occurred in:

…July of 1981, when the effective federal funds rate was 19.2 percent.

One could take it to mean there is room for rates to rise today; however, 1981 also marks the first year America’s national debt surpassed $1 trillion. Today the national debt is over $30 trillion. Few things should ever be considered impossible, but an interest rate at 19.2 percent in today’s world at these debt levels seems impossible. Yet at the same time, it sounds just as impossible to say interest rates can never increase to 5, 10 or even 19.2 percent ever again.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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