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Opinion: The Fed can’t afford to move too slowly on interest rates


Especially after Russia’s invasion of Ukraine and China’s new Covid outbreak, the Fed’s timidity with interest rate hikes likely means we will have to learn to live with a prolonged period of high inflation. . It also means that we have to prepare for a bad economic recession when the Fed will eventually be forced to raise interest rates more aggressively to keep inflation under control.

Even before Russia’s invasion of Ukraine and China’s new Covid outbreak, the US economy was facing an inflationary and financial mess. Last year, the Fed kept interest rates too low for too long and allowed the broad money supply to grow at a rapid pace. He did so at a time when the economy was already recovering strongly and had received a historic $2 trillion stimulus. It also continued to buy large amounts of Treasuries and mortgage-backed securities even as US stock valuations and house prices soared.
As bad as inflation is, Putin’s invasion of Ukraine will surely propel it even higher, given that Russia is a major global supplier of energy, grain and metals. After the invasion began in February, international oil prices soared to over $130 a barrel, pushing gasoline prices to over $4.30 a gallon. (Oil prices have since fallen below $100 a barrel.) Prices for wheat and major industrial metals have also risen at a very rapid pace. And the Covid-related lockdown of a number of major cities in China could also further boost inflation by continuing to disrupt the global supply chain.
What Russia's invasion of Ukraine could mean for America's economic recovery
By heightening geopolitical uncertainty, the Russian invasion appears to have snuffed out part of the Fed’s stock market bubble. Year-to-date, the S&P 500 and Nasdaq are down about 11% and 18%, respectively. At the same time, interest rates on risky loans have risen and financial market volatility has increased.

It is against this unpleasant backdrop of excessively high inflation and deflating stock and credit bubbles that the Fed must carefully weigh its next steps. His upcoming decisions will have a huge impact on the direction of the economy for the rest of the year. If he raises interest rates too aggressively, he might be able to bring inflation under control, but at the risk of bursting asset price and credit market bubbles. This, in turn, could precipitate an economic recession by wiping out household wealth and causing stress in the financial system.

But if the Fed opts for a course of policy moderation, we could see a prolonged period of high inflation coupled with a sluggish economy, or stagflation. Worse still, we should be preparing for a deep economic recession when the Fed is finally forced to tighten the brakes on monetary policy to keep inflation from spiraling out of control.


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Sara Adm

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