AAmerica’s central bankers have hung a pair of hawk feathers on their dove robes. The metamorphosis comes late, but all the more determined. It was signaled by eleven rate hikes by the end of next year to rein in record inflation. In addition, there was the announcement that the bond portfolio built up as part of the quantitative easing program would be reduced. The resolute turnaround comes as a surprise when one considers that just three weeks ago the Fed allowed itself quantitative easing by buying bonds, the opposite of monetary tightening. Inflation was 6 percent.
The monetary policy lag is also due to a rebalancing of monetary policy in 2020. Inflation should no longer be fought preventively, and temporary overshooting of the two percent inflation target should be tolerated. It can be said that this new monetary policy has not worked.
Is Fed Chair Jerome Powell right?
Fed Chair Jerome Powell is confident that he can avoid a hard landing in the economy and runaway inflation. Maybe he’s right. Only: On the American job market, there are currently 1.7 vacancies for every job seeker. The economy thirsts for skilled workers. Workers take advantage of their stronger position and push through higher wages to compensate for the loss of purchasing power caused by inflation.
Companies try to pass on the higher labor costs to normal consumers through price increases, who have new incentives to push through higher wages. A wage-price spiral does not seem that unrealistic in view of the current conditions, which are becoming even more acute as a result of new shortages. The war in Ukraine and the new lockdowns in China are creating new pressure.
Eleven interest rate hikes that the Fed telegraphed to the world are certainly not small. The key interest rate then ends up at just under 3 percent. The last time the central bank reined in record inflation, interest rates had been pushed into double digits.
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