Federal Reserve’s Big Gamble May Be Poised To Backfire

Federal Reserve's Big Gamble May Be Poised To Backfire

Federal Reserve Takes GIANT Gamble – Here’s What We Know

(RightWing.org) – In 2021, President Joe Biden and Federal Reserve Chairman Jerome Powell tried to assure us that price increases were temporary. They said it was an expected short-term outcome of pandemic shutdowns as Americans sought to spend more money after staying home while manufacturers worked to supply store shelves. Still, many economists warned that was an inaccurate statement after the government injected nearly $2 trillion into the economy through the American Rescue Act in March 2021.

Throughout 2022, the country has experienced 40-year record-high inflation. To bring down prices, the Federal Reserve has aggressively increased interest rates. It expects the higher rates will blunt spending and bring prices down. Yet, some believe it’s a big gamble and could backfire on the economy and those struggling to get by.

Will the Federal Reserve Tip the Country Into a Recession?

Since World War II, the US has experienced at least 13 recessions. In over two-thirds of them, the Fed was the culprit; it raised interest rates quicker than the economy could withstand. Now, forecasters say the Fed might do it again.

To better understand how inflation and recession interact with economic policies, let’s define the meaning of the two terms. Inflation occurs when prices of goods and services rise faster than wages, thereby decreasing purchasing power. A recession occurs when economic activity declines for two consecutive quarters (i.e., six months.)

Not only has the country experienced two consecutive quarters of decline, but some indicators also suggest there will not be a rebound in the third quarter as consumer confidence plunges.

As economic activity slows, the Federal Reserve may worsen a bad problem. It uses data reflectively to make decisions moving forward. Despite the economy running out of steam, the Fed expects to raise rates again. At the same time, new unemployment numbers show companies are slowing hiring and letting go of workers. Together, it’s a recipe that’s reducing the chance of a soft landing and a rebound.

Is Raising Interest Rates the Wrong Prescription?

Many economists say the 2020 COVID shutdowns led to a supply chain crisis, but clearly there are other issues at play. Currently, auto manufacturers have cut production due to chip shortages, for example. So, how does raising interest rates solve this problem and create a soft landing? It may not.

Some say if the Fed increases rates further, it will cause manufacturers to pull back on the production of goods. In turn, the lack of supply to meet demand will result in lower profits and worker layoffs. That could perpetuate a worsening problem.

So, is the Federal Reserve’s gamble going to work to get inflation under control?

Only time will tell.

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