The Fed’s rate hike of half a percentage point is significant, which helped push stocks lower on Thursday. But the target federal funds rate, which now sits at 1%, is still historically low and has not exceeded 5% since before the Great Recession.
Higher rates could benefit savers, he writes, and challenge the stock market, which he says “has become accustomed to – if not addicted to – easy money.”
How will the higher rates affect you?
This is likely leading to some buyers leaving the market and for others creating a mad rush to get something and lock in a rate. Housing prices, in theory, nice… finally.
Raising interest rates to fight inflation
Higher rates will make borrowing more expensive, even if the rise is the Fed’s answer to everything else that is already getting more expensive. This is the hard remedy that Fed economists have prescribed to calm inflation caused by a chain reaction of factors:
- Nodes in the supply chain that are not recovering.
- Energy and food market problems created by Russia’s war in Ukraine.
- New Covid-19 lockdowns in China.
Presidents are blamed
None of these explanations will stop Biden from laying blame. A majority of American adults in a new CNN poll say the president’s policies have hurt the economy, and 8 in 10 say the government is not doing enough to fight inflation.
It’s the dichotomy for Biden and policymakers. There is a feeling of dread, but a lack of concern. Americans are spending money, feeling comfortable enough to quit their jobs, and the housing and auto markets have yet to begin to crash.
The economy is still running
In his recent article on the stock market’s worst start to the year since 1939, CNN’s Paul R. La Monica wrote, “Stagflation concerns persist, but so far it’s all ‘flation’ and no ‘deer'”.
He writes: “Although confidence and sentiment measures have declined due to inflation concerns, retail sales remain strong, a phenomenon some economists have dubbed ‘revenge spending’ after two years of a brutal pandemic. And When it comes to corporate earnings, actions speak louder than words.”
What Matters Term of the Day: “Double Dip Recession”
Some economists and market strategists now fear that a brief recession may be inevitable due to these early rate hikes.
But if the Fed takes a victory lap too soon and slows the pace of future rate hikes, the risk is that inflation will come back in full force and lead to another longer and deeper slowdown.
This is the dreaded double-dip recession scenario. In 1980, the economy experienced a short recession that lasted only six months, followed by a 16-month downturn that stretched from the summer of 1981 to the fall of 1982.
White House says look at economy with more nuance
On CNN’s “New Day” show, Brianna Keilar asked Jared Bernstein, a member of Biden’s Council of Economic Advisers, if the president was out of touch with the economy.
“Not at all,” he said, saying Biden would mention inflation whenever he spoke about the economy.
However, Bernstein argued that the numbers suggest people are doing better than the dire perception.
“We have multiple things going on at the same time,” Bernstein said. “We have households that are in extreme malaise, which the president is very mindful of when it comes to inflation. But we also have those households that are hitting this period from a position of strength based on their balance sheets, based on the labor market.
What is Biden doing?
None of these efforts, on their own, will solve inflation, which is Biden’s problem. He can do all he can, and still may not feel like you’ve accomplished much.
This story has been updated with additional information.