Jerome Powell Is Popular. His War on Inflation Could Change That.
The article emphasizes the possible risks from the outcome of Jerome Powell's war against inflation and how it could bring about a legacy that Jerome Powell would not like to be remembered for. Jerome Powell's administration decided to raise interest rates very quickly (the fastest rise in more than 40 years) to curb inflation in the economy recently. With the decision made by the Jerome Powell administration, the economy could be at risk.
Powell could either reduce it back to normal quickly (Back Track his plan) which would lead to what happened during the period of Arthur Burn's administration in the 1970s, or stick to his decision, which if not carefully watched, would lead to recession, just as Paul Volcker's administration in the 1980s (1982). The disadvantage of backtracking before inflation is curbed is that people expect high-interest rates and that would result to rapid price increases to linger. The disadvantage of sticking to it before inflation is curbed is that unemployment would rise rapidly because the cost of wage per labor would increase due to the high-interest rate, which then would lead to recession.
From the news article, I believe consumers and banks are most fearful of the extreme case of recession than a case of a rapid price increase, which is enough reason for Jerome Powell to backtrack his way in order to prevent a recession. But the personality of Jerome Powell, I believe Powell will not want to break track, even stating that "We will keep at it until we are confident the job is done".
In my opinion, I believe what Jerome Powell is expecting is a warning sign before he reduces interest rates, which might not happen. From the new article, during Paul Volcker's administration, the unemployment rate started to increase before the recession kicked in. But unfortunately, with the presence of hybrid and online jobs being offered, the unemployment rates would continue to decrease. The decrease in in-person jobs opportunity as a result of high-interest rates would not easily be shown in the unemployment rate. In conclusion, if Jerome Powell can get his hands on the unemployment rates of hand-skilled jobs (such as farmers, builders, carpenters, and car dealers), he can notice from there, when the spikes occur and not be fixated on the real unemployment rates which have been affected by the presence of hybrid and online jobs which fits people comfort.
https://www.nytimes.com/2022/10/31/business/economy/jerome-powell-fed-inflation.html#:~:text=That%20could%20allow%20officials%20to,in%20the%201980s%20so%20far.
Does consumer fear of recession contribute to the occurrence of these recessions? If so, what should consumers do when hearing the term recession float around?
ReplyDeletePowell is definitely going to fight this war on inflation, so I do not we will be seeing rates decrease anytime soon. Fighting inflation will be the top priority for the Fed and Powell is trying to be as straight forward as possible with his message to Americans. The question will be that will consumers spend less as interest rates continue to rise? Unfortunately, that spillover effect could lead to loss of growth and unemployment.
ReplyDeleteGiven that the main objectives of the Federal Reserve are maintaining an unemployment rate of 4-6% and inflation rate of 2-3%, I would agree that Jerome Powell has no intention of changing his plans to increase interests rates at a relatively quick pace. The problem with multiple changes in interest rates in a short period of time is the fact that consumers are now saving on an inverted yield curve, meaning they will not put money into long term savings until they are confident that interest rates will remain where they stand because the higher interest rate will create a better investment opportunity. This is problematic because the Fed needs consumers to decrease demand in order to further curb the high inflation rates we currently face. I think the best case scenario would be Powell announcing when the Fed feels comfortable with where interest rates stand, but, unfortunately, that announcement cannot be made until the economy sees the impact of the monetary policy.
ReplyDeleteHello Love,
ReplyDeleteThis is a very interesting topic and it has been something that I have been thinking about on a personal level for some time now. For starters, it is essential to understand that when there is a rise in interest rates than consumer spending levels decrease overall. Over the last 3 quarters we have seen a decrease in GDP for the first two of those but an increase in the most recent quarter. Economic agencies state that although by definition that would say that we are in a recession, that is not the case. A recession is determined by many other factors such as UR and LFPR which we would see to be a higher UR and lower LFPR in times of a recession. Now my question to Jerome Powell is what is going to happen to consumer spending when IR rise again in the month of December? Although consumer spending hasn't been the reason for the recession in the first two quarters a decrease in spending would be the effect of higher IR. Which may decrease GDP and put us back into that recession mark. Additionally I must note that if it is publicly announced that we are in a recession then we will dip even more into that. When people expect sunny days they spend, but when people expect rainy days they save. Overall this is a very interesting topic, good job!
Thanks Ryan. your comment makes me thinking more about how do we find out we are in recession? And as you as telling us, will definitely cause further dip.
DeleteDo you think there is a correct or clear choice Powell should make? (either back track or continue raising rates?) I think these recession woes are known and are a consequence the country is going to have to face in order to combat surging inflation. Do you agree?
ReplyDeleteYes, I think he should back-track already or better still stop increasing the interest rates. Hmm, interesting comment, I actually not sure if I do or do not at this point.
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