Is The Fed Making A Mistake That Will Lead To Recession? | The Mesh Report

Is The Fed Making A Mistake That Will Lead To Recession?

the Mesh Report Staff July 20, 2023 Comments Off on Is The Fed Making A Mistake That Will Lead To Recession?

The Federal Reserve Board will serve the U.S. economy well if it continues to pause raising rates, but its determination to hike them will most likely drive the economy into recession quickly, increase unemployment and uncertainty and propel it to start easing again.

While the Fed has done a good job bringing down inflation in the past year, it should be cognizant of its blind spots and the flawed process it has been utilizing to make decisions.

The Fed and its chairman, Jerome Powell, have been unable to recognize a heating or cooling economy in a timely fashion to take orderly action to minimize the negative effects.

In 2019, Powell began to tighten the Fed rate prematurely, recognized his mistake and reversed course.

In spring 2020, facing a pandemic-induced economic collapse, he pumped trillions of dollars into the economy for far too long, held the fund rate close to zero and induced high inflation.

In March 2022, he finally began tightening and has been moving rates higher and faster ever since. So far, he has raised rates 10 times, brought the fund rate to 5 percent-5.25 percent and plans to raise rates by .25 points in the upcoming July and September meetings.

As a result, the Consumer Price Index went down from 9.1 percent to 3 percent in the year through June. And the latest Producer Price Index for all goods minus food and energy — an indicator of future core inflation that the Fed watches — decreased 0.2 percent in the year through June, and according to the University of Michigan’s ongoing survey, consumer sentiment soared to 72.6 in July— higher by 13 percent from June.

These data indicate a steep downward CPI trend that would continue to lower inflation for several more months toward the Fed’s 2.0 percent rate, and therefore not require additional hikes. But the fact that the Fed intends to raise rates twice more suggests an unsound decision-making process. As I have reported elsewhere, for the past 18 years the seven U.S. Federal Reserve Board governors who make up the stable core of the rate-setting committee have voted in lockstep. During that period, spanning approximately a collective 144 decisions and 1,008 individual votes, not one governor dissented. As a result, these decisions could have been made by one person, and in the future, they can be made using AI.

Looking at this issue from a cost-benefit perspective leads to a similar conclusion.

The negatives of raising rates further include a greater chance of a hard landing, that is, a sudden and quickly-evolving recession, a higher rate of unemployment, which tends to affect minorities and people of color more harshly than the rest of the population and thus increase social disparities, and a need to start lowering rates quickly after landing.

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