New York, USA (CNN) – The idea of a three-quarter percentage point rate hike by the U.S. Federal Reserve wasn’t on the list earlier this year, but in just a few months that big leap is become the norm, and it almost certainly will. Jerome Powell’s position as Paul Volcker sealed the current decade.
The Federal Reserve made history on Wednesday as it agreed to raise interest rates for the third consecutive time by 75 basis points. The Federal Reserve is once again trying to counter inflation by using its most powerful and broader force, which is to control the cost of corporate and individual lending money.
The benchmark lending rate is now at its highest level since the 2008 global financial crisis.
So here’s what you need to know:
The move towards a rate hike of 75 basis points was broadly anticipated.
– But the markets still fell due to the belief that the next Fed meeting will include another 75 pip hike and then a 50 pips hike. This is now 25 basis points more than Wall Street expected.
All three major US equity indices fell shortly after the Federal Reserve’s announcement. Then I tried to go back, but I fell again. It was a wild afternoon.
– What does all this mean for ordinary people? I’m sorry to say, but the “pain” that the Fed chief warns about is mainly the pain for people in the middle and lower class, who are more likely to be fired, their wages and hours go down and struggle. to repay their maximum -credit card interest charge. Mortgage rates, which are already more than double what they were a year ago, will also continue to rise.
One of Powell’s biggest critics, Senator Elizabeth Warren, was quick to tweet condemning the “drastic” rise, which the Fed itself predicts will raise the unemployment rate from the current 3.7% to 4.4%, a loss. over a million jobs.
Take a step back
To understand the Fed, it helps to understand Powell.
In his role as chairman of the Federal Reserve, Powell made no secret of his admiration for Paul Volcker, whose name is practically synonymous with fighting inflation at all costs, even if it leads to economic recession. This is exactly what Volcker, the former Federal Reserve chairman, did twice in the early 1980s.
Testifying before Congress in the spring, Powell described Volcker as a hero, saying he was “the greatest economic official of the time”.
Part of the reason Powell and others remember Volcker so favorably is that it requires an intelligent mind and the ability to make strong decisions to:
A – Understanding the problem of rampant inflation.
B – Implementation of traumatic shock therapy for the high interest rates that cost millions of people their jobs.
Volcker’s plan worked, but it really took some time and there was already some pain, Powell said.
Inflation is now the highest since Volcker led the Fed, and the central bank itself is facing a credibility crisis for not acting fast enough to keep price increases in check.
Credibility was a major concern for Volcker as well.
The bottom line: Powell continues to pull back from Volcker’s playbook, which means he is unlikely to hesitate to work towards the Fed’s 2% inflation target, lest the central bank’s credibility take another hit. Only time will tell if the 40-year-old playbook is still applicable in a fundamentally different economy than the one Volcker encountered.
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