Jerome Powell extends our economic agony


Can we all agree that the Federal Reserve has a plan to fight runaway inflation? They do. President Jerome Powell almost admitted it. After tempering his comments before previous rate hikes, leaving room for market rally, Powell has no problem with this. It is necessary to destroy the economy and put downward pressure on labor markets and wage increases to halt creeping inflation. Whether you believe that logic or believe — like Elon Musk — that such moves could lead to deflation — doesn’t matter.

All that matters is what those who vote on the rate hikes believe, and there’s plenty of evidence that they won’t stop until interest rates are above 4%. Wednesday’s 75 basis point rate hike only takes us in that direction. This is the third such 75 basis point adjustment, and we were almost told it wouldn’t be the last. While these rate hikes were historic, they prolong the economic pain associated with them. It’s time the Fed was brutally honest about where the economy stands and where it’s headed.

Jerome Powell has said he wants to give the economy a soft landing. However, he also said: “Our responsibility to deliver price stability is unconditional.”

Only the soft landing he wants to achieve is something out of a science fiction novel. It is something that those who follow the situation do not believe. Former President of the Federal Reserve Bank of New York, William Dudley, admitted that, saying, “They are going to try to avoid a recession. They are going to try to make a soft landing. The problem is that the space to do that is virtually non-existent at the moment.”

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Loretta Mester, president of the Cleveland Federal Reserve Bank, one of 12 who voted on the rate hike, has joined Powell in saying that the Fed should raise rates above 4% and keep it there. Only one question remains, and it’s not where the interest will end. The question: why is the Fed insisting on dragging the pain away?

There is no doubt that a 150 basis point rate hike will really shake up the market. So does a 75 basis point increase with the promise of more to come. There is an advantage to taking the plunge in one go. Once done, Powell could have come out and clearly chart a path forward. He could have assured Wall Street, citizens and trading partners around the world that the 150 basis point increase is the magic bullet needed to curb inflation and that any other move would be inches instead of miles. Instead, Powell noted in his Wednesday press conference that another 100 or 125 basis points of increases would be needed by the end of the year.

Federal Funds Effective Rate from 2010 through August 2022. Source: Federal Reserve Bank of St. Louis

As with most changes, clear communication is the most important element to get buy-in. At this point, traders feel betrayed. At the outset, the Fed’s forecasts indicated that a 75-point rise was historic and unlikely to be repeated. Yet inflation continues. In the long run, a fair approach would create more turmoil up front, allowing healing to begin much faster.

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A Brookings Institution survey, Understanding US inflation during the COVID eracame to an unsurprising conclusion: the Fed “will likely need to push unemployment much higher than its forecast of 4.1 percent if it is to succeed in bringing inflation back to its 2 percent target by the end of 2024.”

The Fed has kept interest rates at historically low levels for more than a decade. Investors, businesses and society have begun to act as if near-zero rates were the norm. Understandably, this rapid departure from the norm has shaken markets. And the implications extend far beyond the markets. The implications of such increases for the national debt are even more excruciating.

However, the increases are coming. There is no doubt about that. To continue the sham that 75 basis points, and some similar extra raises, is somehow more palatable because the markets don’t feel it all at once is pure poppycock. The markets, as well as investors, deserve to know the truth. Equally important, society deserves to begin the road to recovery. We could have started this morning. Instead, it will be in the coming months.

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As for cryptocurrency, the rate hike should not change the trend compared to traditional assets. Any hit in the market will affect both digital and traditional assets. In order for a new bull market to emerge, regulations will have to be reformed. That won’t happen until at least next year. The sooner the Fed hits its magic number, the faster the economic recovery will begin. That way, the crypto community should prefer an accelerated timeline. Tear off the patch and let the healing begin while the legal guidelines are negotiated. Then crypto will be in a position where it can flourish again.

Richard Gardner is the CEO of Modulus, which builds technology for institutions such as NASA, Nasdaq, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Microsoft, Cornell University and the University of Chicago.

This article is for general information purposes only and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of TBEN.


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