This week, the Federal Reserve will be meeting to again discuss another likely interest rate increase by 0.75%, as well as signaling further interest rate increases in December. “We will have a very thoughtful discussion about the pace of tightening at our next meeting”, said Fed governor Christopher Waller. The Fed has raised its federal-funds rate three consecutive times at their meetings, where we now see rates at the same level as during 2008. Even Fed officials are making a case for being more cautionary with interest rates. The Fed’s motives are to make strong and decisive moves to suppress inflation, which peaked in June but have been cooling off since.
The Fed is motivated by its desire to fulfill its dual mandate – to reduce unemployment and to provide price stability. But, economists are now expressing concerns over the Fed’s possible over-involvement in the economy. When making such large efforts to control inflation by inducing economic downward movement, the central bank may betray its own intentions and trigger a much larger downturn.
Fed Chairman Jerome Powell attests that the Fed is making the proper decisions saying, “I wish there was a painless way to do that. There isn’t.” Harvard University economist and advisor to George W. Bush retorts, “they’ve done a tremendous amount of tightening … Recessions are painful for a lot of people. I think Powell’s right that some pain is probably inevitable…but you don’t want to cause more than is necessary.”
Businesses are not optimistic about the direction of the economy as the Fed is observing uneven growth across the country and “growing concerns about weakening demand” that are attributed to “higher interest rates, inflation, and supply disruption.” Raising interest rates functions as a macroeconomic affect that reduces consumer demand, where ultimately people are made poorer and business activity subsides to slow down overall economic activity so inflation is sequestered. Coupled with this, economists predict an impending recession within the next few years, while the current Fed policy may only be exacerbating actual economic issues. Furthermore, economic forecasters find it more likely for a recession due to their doubts in the Fed being able to control inflation through monetary tightening.
Though there are many indicators of impending economic trouble, there is still some good news. The US economy still has grown in the third quarter, despite broad slowdowns, due mainly to consumer spending and the labor market. However Fed policy has only served to suffocate GDP growth and will continue to do so as long as pushing interest rates are sustained.
Joseph Brusuelas, chief economist at RSM US says, “it is critical that policymakers…prepare for a slowdown in demand as the lagged impact of rising interest rates and inflation begins to exert a powerful downward pull on economic activity,” and the economy “clearly is at risk of falling into recession in the near term.”
Diane Swonk of KPMG, a professional services network, adheres to the false notion that “the Federal Reserve is choosing between the lesser of two evils—take a recession with a rise in unemployment today or risk a more corrosive and entrenched inflation taking root.” It is not convincing that the Fed’s actions are a safe-route to avoid a worse outcome – it is playing with fire under the guise of economic safety and needs to reevaluate both its short and long-term economic strategy.
The Fed has political motives as well. International tensions remain high and the United States desires to maintain economic stability to remain as a dominant global actor. The Federal Reserve operates as a political entity over the United States’ economy – it seeks to set a precedent by affirming its authoritative role over economic activity to direct it in a controlled manner. Indeed, there are also implications that the Fed desires to sustain its credibility by taking action now, even though it may not be the best option, to avoid blame for not enough action in the future. The potential for the threat on the Fed’s own image and the US economy as a whole pushes the Fed to seek resolution in the present moment rather than taking a more passive role.
It is clear that the Federal Reserve has undertaken questionable economic policy and are making dangerous monetary decisions. Though raising interest rates may present itself as a lesser evil it is a destructive economic policy which will have consequences in the near future.
