The near certainty of another 50-bps rate hike at the Federal Open Market Committee (FOMC) next week forces us to consider the monetary system in which we find ourselves; whereby currency debasement is a useful economic tool, that is until it becomes detrimental, which according to the Fed, can only be cured by rate increases.
Let’s see what the planners have been saying regarding next Wednesday’s announcement. CNBC reports that Cleveland Fed President Loretta Mester claims:
…she doesn’t see ample evidence that inflation has peaked and thus is on board with supporting a series of aggressive interest rate increases.
Clearly, more pain lies ahead. Elaborating on this, she provides the following quote:
I don’t want to declare victory on inflation before I see really compelling evidence that our actions are beginning to do the work in bringing down demand in better balance with aggregate supply.
According to her, the June, July, and September meetings could see a 50-bps rate hike and that a pause on rate hikes is unlikely.
Not alone in that sentiment, San Francisco Fed President Mary Daly supports diligently raising rates until “inflation comes down to a reasonable level,” going to say:
We need to do that expeditiously, and I see a couple of 50 basis point hikes immediately in the next couple of meetings to get there… Then we need to look around and see what else is going on.
It’s unclear what she means by “what else is going on,” but it could be a recession, stock market crash, or a housing market collapse…
The Fed’s second in command also gave insight on what our future holds. Fed Vice Chair Lael Brainard said it’s unlikely the Fed will break its rate hiking cycle “anytime soon.” Strangely confident about the state of the economy, she was quoted:
We’re certainly going to do what is necessary to bring inflation back down… That’s our No. 1 challenge right now. We are starting from a position of strength. The economy has a lot of momentum.
Between the three of them and the latest FOMC minutes, which echoed similar sentiment, the world is expecting more rate hikes for the foreseeable future. Of course, it’s not without its challenges. Talk of a recession has been aggressively making headlines. As CNBC explains, data from the Atlanta Fed showed this could be “the second quarter of negative growth,” the official marker of a recession. Reiterating:
…the economy doesn’t have much further to go before it slides into what many consider a recession.
However, CNBC was quick to explain that:
To be sure, while the notion of two consecutive negative GDP quarters is often considered a recession, that’s not necessarily true… However, there has never been a period with consecutive negative-growth quarters that did not entail a recession, according to data going back to 1947.
Where the members of the Fed see strength, others see great weakness. With rates raising next week and the balance sheet finally set to shrink this month, it will be interesting to see how the markets and GDP figures fare in the months ahead.
With today’s Consumer Price Index (CPI) reaching 8.6% for the month of May, we must also wonder just how high will they raise rates to fight inflation readings, and how many rate increases can this so-called strong economy take before it implodes?
