Fed economy monitors and is cautious about interest rates
Policymakers can raise inflation rate to 2% without causing a recession. head of the Federal Reserve Bank in Atlanta was speaking in an interview. The head of the Federal Reserve Bank in Atlanta, Rafael Bostic, said that policymakers have time to monitor how the economy develops and be patient when it comes to movements… interest rates. “Today, my expectation is that we will stay in this slow and steady mode, and if we continue to do that, I think where we are now will be constrained enough to get us to 2% inflation level,” Bostic said. He added that he believes officials can raise inflation to levels “close to our target without seeing a recession.”
US central bank’s Federal Open Market Committee, which sets US central bank policies, kept interest rates at their highest level in 22 years for the second straight meeting on Wednesday. Chairman Jerome Powell told reporters at a news conference that it is an open question whether the central bank will need to raise interest rates again, and that Fed is “moving cautiously
Policymakers have said they want to raise interest rates to a level that is “sufficiently constrained” to put inflation on a meaningful path to 2% and then keep it at that level for some time. Bostic said that his expectations are that interest rates will remain high in the second half of next year, that is, for another 8 to 10 months. “It’s still a long way off
comments from the head of Federal Reserve Bank of Atlanta came after a report showing a slowdown in the jobs market. A Bureau of Labor Statistics report on Friday showed that the number of nonfarm payrolls rose by 150,000 last month after a downwardly revised reading of 297,000 in September.
Growth will need to slow in the coming months
Bostic, who has been among the Fed’s most dovish policymakers, has argued since June that the central bank should hold off on additional rate hikes because previous actions would slow the economy and gradually reduce price pressures. Bostic, who took office in 2017, said that as inflation slows, real interest rates rise so that monetary policy becomes more restrictive in a “negative tightening” that would put downward pressure on prices.
While he does not expect a recession in his baseline forecast, growth will need to slow in the coming months. The US economy grew by 4.9% in the third quarter, supported by strong consumption. “We’re going to be in kind of slow and steady growth, which is systematically the highest in four weeks” and “the largest in a year,” Bostic said. So it is interesting to read that the fall of Lehman Brothers was followed by central banks cutting interest rates to their lowest levels in five millennia. .
With low interest rates, central banks were obsessed with the idea of targeting inflation, which blinded them to the damage, and they “never studied or resolved” the repercussions in the face of the 2008 crisis and the difficulties resulting from sovereign debt in Europe and other issues. Chancellor gave examples from different eras and countries that all attribute damage to growth, productivity, savings and investment to very low interest rates. Low interest rates help zombie companies survive, while also increasing inequality, inflating bubbles, and destabilizing financial stability. He criticizes the Federal Reserve’s policy for low interest rates dating back almost to its founding in 1913. He says in his book that the Federal Reserve’s “suppression of economic fluctuations encouraged the accumulation of financial leverage,” as accommodative monetary policy led to igniting the fuse of the 2008 financial crisis.
Misinvestment resulting from very low interest rates
Among examples of “misinvestment resulting from very low interest rates,” Chancellor highlights price-controlling cartels, pointing to research that confirms that interest rates are the most important factor affecting these entities. Low interest rates lead to overvaluation of start-up companies. Another example is the Arab Spring, which Chancellor believes arose in conjunction with the decline in US interest rates, which in turn led to the flow of capital to emerging market economies and the rise in food prices.
There are also cryptocurrencies that sparked a state of mania, and they are “the product of monetary conditions” and not just technology: “The devaluation of their currencies by central banks meant the necessity of creating a new type of money.” In light of the lack of critical awareness, fears are renewed about capitalism, liberalism, and even democracy, in Chancellor’s opinion. Central banks manipulate “the most important price of all in the market economy” and the beating heart of capitalism.
The author believes that in the absence of this movement resulting from the cost of borrowing, it is impossible to evaluate future income or make the correct decision regarding the distribution of capital resources, and savings shrink. Thus, a vicious cycle of stormy negative effects looms on the horizon. Chancellor concludes in his book that the continuation of these conditions “will require that state investments replace private investment, and central banks replace commercial banks to become the main credit provider.” “Without the benefit of regulating financial behaviour, an unstable financial system will naturally need an endless number of new regulations.
For his part, he pointed to one of the problems facing the American economy, which drives inflation rates to rise, and thus the Fed keeps interest rates within their high limits, which is the high problem of “the large deficit in the government budget.” He points out that “US interest rates will begin to fall when inflation naturally declines, while the large deficit in the government budget contributes to higher interest rates and higher inflation,” and here the dilemma arises based on which the markets see that there is still a long way to go to overcome these challenges.
The latest inflation report in the United States showed that the consumer price index stabilized at 3.7 percent last September on an annual basis, contrary to expectations that it would decline. The American economy suffered with the sudden rise in costs associated with housing, as well as those associated with hotel rooms and entertainment services. The core CPI – which excludes volatile food and energy prices – fell year-on-year to 4.1 percent, in line with expectations, the lowest level in more than two years.