Column: The price of eliminating inflation, if the FRB assumption is exceeded, politics will be ‘chestnuts on fire’ | Reuters

NEW YORK (Reuters Breakingviews) – The US Federal Reserve has shown the cost of fighting inflation. That’s years of sluggish economic growth and over a million new unemployed people. If this is all it takes to keep prices down, it’s a cost worth accepting. However, if Fed Chairman Powell’s assessment is wrong, the blame will fall on President Biden and Congress.

The Fed raised interest rates by 75 basis points (bp) at the Federal Open Market Committee (FOMC) meeting through June 21, suggesting it may push rates higher than investors expected. FOMC members expect policy rates to reach as high as 4.6% next year. Meanwhile, investors expected the policy rate to peak around 4.4%, according to the Atlanta Federal Reserve. The unemployment rate may rise to 4.4%, or 1.3 million more unemployed.

For now, the Fed believes it can achieve price stability without a hard landing for the economy. US gross domestic product (GDP) growth slowed to 0.2% in the third quarter and will grow 1.2% over the next year, well below the 2% the Fed sees as a long-term trend. stable growth trajectory by the end of 2024. Such an economic climate will hurt companies in the short term, and some companies are already breathing a sigh of relief due to the economic slowdown. But it’s better than a prolonged economic downturn.

In light of past rate hike cycles, the current Fed is either optimistic or trying to convey bad news quietly. However, Mr. Powell is correct in saying that inflation hurts more than disadvantageous growth. While unemployment will drive millions off the streets, rising prices will hurt everyone in some way. About half of small businesses say inflation is their biggest challenge, according to the US Chamber of Commerce, a public sentiment echoed by a May poll by the Pew Research Center.

Furthermore, the risk of sustained damage from an economic slowdown is small. Banks report that customers still have more cash on hand than before the pandemic and that loan delinquency rates are increasing, but at a slower pace. JPMorgan Chief Executive Dimon told a House of Representatives hearing that the financial industry “can handle a hard landing without difficulty.”

Mr. admitted Powell in a press conference on Wednesday that there is no painless way to transform the economy. If the pain turns out to be more than he thinks, the “chestnuts in the fire” must be raised by Biden and Congress. They will spend the next two years dealing with rising unemployment and a difficult economic climate. A massive rate hike by the Fed could put an end to inflation, but it could also lose a powerful ally in the process.

●Background news

* The Fed decided to raise the policy rate by 75 basis points to 3.00-3.25% at the FOMC meeting until the 21st. The rate increase of 75 basis points is the third straight since May.

(The author is a columnist for Reuters Breakingviews. This column is based on the author’s personal opinion.)