The Federal Reserve admitted to United States residents that they should be preparing for more economic pain ahead.
It’s not like we aren’t already feeling the pain. There is pain at the gas pump, there is pain at the grocery stores, there is pain in the electronics we purchase, and if you are in one of those states where home prices continue to skyrocket (hello, California), well there is pain in mortgage prices as well. And if that is not enough pain for any of you, the Federal Reserve is issuing another warning – prepare for more pain.
Words come cheap; reality is where the damage is done. Federal Reserve Chairman Jerome Powell recently said that he and his cronies, excuse us, he and his colleagues have pledged to continue raising interest rates until that time that inflation is finally under control. Powell was speaking at an economic conference in Jackson Hole, Wyoming when he admitted that the higher borrowing costs that everyone is now seeing will more than likely (aka definitely) cause more pain in the short-term (aka as long as they wish) for families and businesses. In this instance, his words are definitely not cheap, and the reality of the situation is just beginning to manifest.
Because of our new reality, we may see the unemployment numbers start to jump again. Most definitely the economy will rise at a snail’s pace. But Powell expressed his thoughts via another warning saying that the alternative could be even more detrimental than the short-term. If we are to allow inflation to continue rocking this nation unchecked, things will get much, much worse.
“Without price stability, the economy does not work for anyone,” Powell said via NPR. “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored,” Powell continued. “We will keep at it until we are confident the job is done.”
Throughout most of the COVID pandemic, the “job” that the Federal Reserve had been doing was keeping the interest rates as close to zero as possible. Job well done. Since March of this year, though, the Federal Reserve has pushed those rates up by 2.25 percentage points. Yikes. And true to his word, we are staring the “short-term” right in the face. Powell and Federal Reserve say more rate hikes are on their way and the next one may come in September at the next Fed meeting.
This news had a massive effect on the stock market as the notion of higher interest rates had sellers selling. The Dow Jones Industrial Average dipped 3% (a 1,000-point decline) after Powell’s candid comments. His Federal Reserve warnings also cause the S&P 500 index to drop by almost 3.4%. Folks, times may be tough now, but buckle up, it may turn into an even bumpier ride.
Could there be some good news? Let’s dig and see. Recently, the Commerce Department tossed out a lifeline saying that there is evidence that inflation might be easing up. The personal consumption prices within the department’s index, which the Federal Reserve keeps a keen eye on, actually fell between June and July by 0.1%. This came mainly from gas prices (which shot into the stratosphere) finally dropping. If you remove food and energy costs (yes, we know those are big financial burdens), inflation sat at 4.6% over the 12 months ending in July. The Federal Reserve says this represents the smallest increase in nine months. But Powell is hesitant to put this one in the win column just yet.
“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what [Fed policymakers] will need to see before we are confident that inflation is moving down,” Powell said. So, while they need to see more, so will they need to see interest rates tick higher.
The Federal Reserve meeting in Jackson Hole is not without relevant history. The first instance of these meetings with big-wig bankers and other economic professionals occurred way back in 1982 when the then Federal Reserve Chairman Paul Volcker had been given an invitation by the Federal Bank of Kansas City to speak at a conference. Now, the conference organizers knew that Volcker was keen on fly-fishing, so they chose to set up the meeting in the pristine wilderness of Jackson Hole, right at the massive feet of the Grand Tetons.
When Powell spoke of this, he also noted that when Volcker assumed control of the Federal Reserve, our nation had already seen the decade-long failures of inflation control efforts. So, when Volcker began to work his magic, we had already gotten used to (in relative terms) the soaring prices. It took massive effort – high interest rates and a severe recession – for Volcker’s Federal Reserve to turn the financial tides.
Powell’s Federal Reserve looks to not follow in those long, drawn-out footsteps. “History shows that the employment costs of bringing down inflation are likely to increase with delay,” Powell said. “Our aim is to avoid that outcome by acting with resolve now.” In other words, let’s deal with the pain now so the future won’t hurt.