In a bit of a boost, an accumulation of economists and Fed pundits have begun to argue that the central bank is now acting too forcefully to slow the economy — and overcorrecting past mistakes. Many critics supported the Fed’s decisions last year, when officials delayed raising interest rates to allow the labor market to recover as much as possible, even as inflation climbed.
The pullback has gained traction as analysts cut growth forecasts, the stock market tumbles and the lagging effects of earlier Fed rate hikes have yet to filter through to the economy. Meanwhile, many of the world’s major central banks are raising rates simultaneously, in a precarious economic experiment that has never been tried before.
Job growth slows in September but remains solid after months of strong labor market expansion
“Running the economy is like steering a big ship. It moves very slowly, and once you get back to normal, it continues,” said Greg Mankiw, an economist at Harvard University and former chairman of the Council of Economic Advisers during the George W. Bush administration. Mankiw a joined a growing group of economists left and right arguing that the Fed is dragging the economy too hard. Mankiw said the Fed obviously has never been in this position before, but “it’s easy for a novice to overreact, and if you turn the other way too much, it can be a source of instability rather than stability”.
Central banks seem to be facing new headwinds going into the week. A United Nations Agency, the head of the International Monetary Fund and the world trade organization all warned of a global slowdown as interest rates rise in major economies from Australia to Europe. A coalition of oil-producing nations led by Russia and Saudi Arabia announced last week that it would cut oil production, a move that will soon send gas prices back up. The move came as President Biden and Western leaders tried to keep oil prices lower as part of their response to Russia’s invasion of Ukraine.
The Fed has reduced expectations for economic growth in 2022, and no one knows how long it will be before the slow effects of rate hikes are fully felt.
“The Federal Reserve has tightened policy sharply to bring inflation down, and US tightening is being amplified by simultaneous foreign tightening,” Fed Vice Chairman Lael Brainard said. said in a speech on Monday. “We are starting to see the effects in some areas, but it will take some time for the cumulative tightening to trickle down to the wider economy and bring inflation down.”
Major stock indexes tumbled as Wall Street panicked over the Fed’s promise of further rate hikes and plunged nearly 3 percentage points on Friday after the latest jobs report showed the labor market still hasn’t cooled significantly – another sign the Fed is unlikely to subside anytime soon. Major indexes also fell slightly on Monday, with the Nasdaq composite hitting a two-year low, led by falling tech stocks.
Yet, unlike other sectors of the economy, central bankers are not specifically aimed at cooling the stock market. Over the past few weeks, officials have said wild swings don’t shape their decision making. Stocks have been volatile in response to almost all economic indicators.
“I have recently read speculation that financial stability issues could eventually drive the [Fed’s policy committee] slow rate hikes or stop them earlier than expected,” Fed Governor Christopher Waller said in a speech last week. “Let me clarify that this is not something that I envision or think is a very likely development.”
The labor market is slowing, and this may be just the beginning
Entering the home stretch of the year, the Fed’s campaign to reduce inflation could undermine the economy’s remaining strengths. The labor market is cooling in some areas but generally remained resilient thanks to tighter monetary policy, with employers adding 263,000 jobs in September. The number of job openings fell by more than one million in August, an encouraging sign for Fed officials aiming to bring the number of vacancies more in line with the number of people looking for work. So far, there have been about two openings for every job seeker, although that number is slowly falling. Consumer spending and personal income both rose in August, and consumer confidence rebounded as gasoline prices fell Summer.
But Fed leaders say they are focused on inflation and see no reason to stop raising rates just yet. Central bankers are expected to raise rates by 0.75 percentage points at their November meeting and by 0.50 percentage points in December.
Officials say their decisions will depend on the data. The September jobs report, which showed continued growth, is unlikely to alter plans as the labor market is still in flux and job vacancies remain high. New federal inflation data to be released Thursday could sway those decisions, though officials say they need to see months of clear and steady progress on lowering prices. This litmus test is far from being met.
The Fed raises interest rates by 0.75 points to fight inflation
“Reports in recent months have shown that high inflation has been stubbornly persistent, while the labor market has remained strong,” Fed Governor Lisa Cook said in a statement. speech last week ahead of the September jobs report. “Being dependent on the data, I have revised my assessment of persistence of high inflation upwards.” She noted that she “fully supports” the Fed’s decision to raise interest rates earlier this year.
The Fed kept rates near zero for much of the pandemic, even as inflation rose. Since March, he has rushed to bring rates into “restrictive territory,” where they actively slow the economy. The bank increased rates by 0.75 percentage points for the third time in September, obtaining the reference interest rate between 3% and 3.25%, higher than it has been since 2008.
Econ 101: Navigating the Economy
But rate hikes don’t bring immediate clarity. This reality has inspired growing criticism from liberal lawmakers and Fed watchers who say fighting inflation ultimately involves the wrong target. Rate hikes stifle demand in the economy, but they do nothing to address supply issues, such as oil and gas shortages, affordable apartments or chips for new cars.
Some inflation may come down on its own as supply chains thin out and the pandemic continues to wane. But after months of central banks Due to high demand, companies could stop hiring and lay off long before rental costs, gas prices or new cars drop, critics say.
“This idea that we tackle global supply shocks with domestic interest rate policy is probably not going to age well,” said Lindsay Owens, executive director of Groundwork Collaborative, a progressive group focused on economic policy.
Owens likened the risks of the Fed’s approach to a frog that sits in a pot of gradually boiling water: “You don’t know you’re cooked until it’s done,” he said. she declared.
The Fed’s tools may be limited, but its work is both to maintain price stability and foster a strong labor market. Officials say that if they don’t raise rates enough now, inflation will only get worse and force the central bank to act more aggressively later. The bank also appears to calculate that the labor market has been so strong that it can bear the costs of a return to normal prices.
Officials have warned of economic hardship ahead. And that means that even once it bubbles up — in the stock market or in people’s wallets — they won’t pivot.
“It’s far too early to make that call,” said Douglas Holtz-Eakin, chairman of the conservative American Action Forum and former director of the Congressional Budget Office. “What you hear are voices from Wall Street living off easy money for a decade. And I’m sorry, times have changed. My message is: deal with it.