(RightWing.org) – In March 2021, signs of inflation were imminent. President Joe Biden and Federal Reserve Chairman Jerome Powell said that price increases were inevitable as the economy began to re-emerge from the COVID shutdowns and lockdowns as the demand for goods would be higher than the supply. They said the situation was transitory and temporary. Still, some warned that Biden and Powell were wrong.
By late fall 2021, it was evident that inflation was a real and serious threat to the lower and middle class. In December, the Federal Reserve signaled it would decrease the amount of assets it was buying to none. By March, it began increasing interest rates to combat inflation.
Federal Reserve Increases Interest Rates
The Federal Reserve is working in a unique environment. Unparalleled trillions of dollars in government spending, massive increases in wages, supply chain issues, a government forced reduction in US energy production, and a geopolitical war between Russian and Ukraine helped lead the way to rising prices on everything from gasoline and groceries to cars and housing — and everything in between.
On Wednesday, March 16, the Federal Reserve increased interest rates from 0.25% to 0.5%. By the end of the year, the nation’s central bank projects rates could increase to 2%.
So, why the increase now?
Consumer inflation is the highest it’s been in 40 years. In February, the government said it rose 7.9% over February 2021. Wholesale prices rose 10%, and economists say it isn’t likely to cool off anytime soon.
By increasing interest rates, the Federal Reserve hopes to pull money out of the economy. Raising interest rates would make it more expensive for households, businesses, and the government to borrow. The theory is that high borrowing costs will slow down consumer demand, allowing manufacturing and the supply chain to catch up and create price stability.
Could the Fed Trigger a Recession or Stagflation?
In the 1970s, America experienced the most remarkable inflation rate since the Civil War. In the early 1980s, then-Federal Reserve Chairman Paul Volker aggressively increased the short-term interest rate to 20%. In turn, unemployment rose to 11% in 1981. For a short time, it was painful for America.
In the end, Volker’s strategy worked. The Fed ended rapid price inflation that crippled the 1970s. In the 1980s, America had one of the most significant economies in US history. Still, it took nearly 20 years for the Federal Reserve to act. It’s not making the same mistake this time.
Some economists say the Fed is in a no-win situation. As interest rates rise, inflation is unlikely to subside in 2022 or perhaps even into 2023. If Powell tips interest rates too much too quickly, it could tip America into a recession. Even worse, many Wall Street experts are preparing for stagflation — meaning inflation remains oppressively high and the economy experiences anemic growth. Stagflation was the crippling 20-year problem in the 1960s and 1970s.
The US economy is also integrated more fully into the international monetary system. There are many things out of the Federal Reserve’s control. The pandemic is also still out there, and no one can predict its future.
The question is, will interest rate hikes work?
Stay tuned. There are too many unknowns to predict what will happen.
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