Why the Fed Rate Hike May Not Stop Inflation

Federal Reserve (Fed) Chairman Jerome Powell reiterated the Fed’s position on interest rates in his speech at an IMF-sponsored seminar Thursday (April 21, 2022). The Fed sees inflation running away and wants to use its tools to stop it. “Getting inflation back to the 2% goal,” adding, “Inflation is really a global problem [but the U.S. has a] “higher core inflation than Europe.”

Whether the Fed really has the means to stabilize consumer prices is strongly doubted from many sides. Not least because the rise in consumer prices is not solely due to the expansion of the money supply, but the supply chains are being tightened above all politically.

Sanctions on Russian banks and commodities have sent prices soaring. Nickel prices recently surpassed $100,000, and gas, coal, and oil prices have reached heights last seen during the financial crisis. A U.S. and Canadian embargo on imports of energy products from Russia or the EU embargo on coal from Russia, are political decisions. So is the exclusion of some important Russian banks from the SWIFT system and the pressure on companies to turn their backs on Russia. Especially the EU will be under massive price pressure in the near future as cheap raw material imports from Russia will be replaced by other more expensive imports.

Does the Fed have the tools to re-establish supply chains that have been politically tightened?

This is highly doubtful, even if the Fed is talking about an interest rate increase of 0.5% for the next Fed meeting. The Fed should rather keep in mind that their interest rate plan does not lead to a disaster. This also sees Powell when he said, “Our goal is to use our tools to get demand and supply back in sync, without a recession.” With this, the Fed admits that it sees the danger of a recession through its plan to raise interest rates. This should be prevented at all costs and would also put the decision-makers in the White House under strong pressure.

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