‘Powell tells Congress that Fed will raise rates this month’ ‘Central banks feared inflation but now confront spectre of stagflation’

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Jerome Powell
(Wikipedia)

The head of the US Federal Reserve says the Fed will raise interest rate this month:

Powell tells Congress that Fed will raise rates this month

March 2, 2022

WASHINGTON (AP) — Federal Reserve Chair Jerome Powell made clear Wednesday that the Fed will begin raising interest rates this month in a high-stakes effort to restrain surging inflation.

In prepared testimony he will deliver to a congressional committee, Powell cautioned that the economic consequences of Russia’s invasion of Ukraine are “highly uncertain.” He says the Fed will “need to be nimble” in responding to unexpected changes resulting from the war or the sanctions that the United States and Europe have imposed in response.

The Fed is widely expected to raise its benchmark short-term interest rate several times this year beginning with its March 15-16 meeting.

A rate hike next month would be the first since 2018. And it would mark the beginning of a delicate challenge for the Fed: It wants to increase rates enough to bring down inflation, which is at a four-decade high, but not so fast as to choke off growth and hiring. …

Powell acknowledged that consumer price increases have jumped far above the Fed’s target of 2% — inflation hit 7.5% in January compared with a year earlier — and that higher prices had persisted longer than expected.

“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” the Fed chair says in his testimony to the House Financial Services Committee on the first of two days of semiannual testimony to Congress. https://apnews.com/article/business-united-states-inflation-jerome-powell-congress-719fda925333df075d25925429dfc1b3

Some are concerned that raising interest rates in view of what is happening now with Russia and Ukraine may push world economies into stagflation:

Central banks feared inflation but now confront spectre of stagflation

2 March 2022

The Russian invasion of Ukraine and the West’s unprecedented response to it have added new complications to the already-complex decisions the world’s two key central banks were confronting as their economies emerged from the pandemic.

The courses for the US Federal Reserve and the European Central Bank (ECB) had appeared set.

With economic growth strengthening and inflation rates fuelled by global supply chain disruptions and shortfalls in supply relative to the surprising strength of demand – shortfalls most evident in soaring oil and fuel prices – both the Fed and ECB were about to start raising their interest rates. …

The extent of inflation within their economies – 7.5 per cent in the US and 5.6 per cent in Europe – handcuffs them. More ultra-cheap liquidity would only fuel more inflation.

It also complicates how they respond to the economic effects of the invasion and sanctions.

Russia’s role as the world’s third largest oil producer, the significance of the combination of Ukraine and Russia to grain markets – nearly 30 per cent of all wheat exports, 75 per cent of global sunflower oil exports and key exporters of corn – and Russia’s importance in markets for metals like aluminium, nickel, palladium and titanium is causing sharp rises in the prices of all those commodities. …

The world’s central banks face the spectre of continuing high inflation rates and an abrupt slowing of economic growth. That was the combination that produced stagflation during the OPEC oil embargo in the 1970s.

Whether we get stagflation – high inflation and no economic growth – or just a slowing of growth while inflation rates remain high, the invasion will cause the central banks to rethink the courses of their policies for the rest of this year.

The threat of stagflation is unlikely to change the direction of monetary policies, given how elevated inflation rates were even before the invasion, but will probably change their pace. https://www.smh.com.au/business/banking-and-finance/central-banks-feared-inflation-but-now-confront-the-spectre-of-stagflation-20220302-p5a0vu.html

The euro zone could be vulnerable to stagflation in the wake of the Russian attack on Ukraine, according to European Central Bank Governing Council member Mario Centeno.

The Portuguese governor, speaking in an interview in Lisbon on Monday, said he favors continuing the monetary policy “normalization” flagged by officials in recent weeks, though he acknowledged that the conflict could yet impact how that materializes.

“I am convinced that the traction of growth that the economy was following will prevail,” Centeno said. Still, “a scenario close to stagflation is not out of the possibilities that we can face. So we need to adjust our policies to that.”

The governor, a former Portuguese finance minister who used to lead meetings of his euro-region counterparts, spoke as the ECB prepares for a major decision on March 10. Policy makers have been preparing to wind down bond purchases in the face of record inflation, a task now complicated by the economic impacts of war and sanctions. 02/28/22 https://finance.yahoo.com/news/ecb-centeno-t-rule-stagflation-110003164.html

So, the view is that although stagflation is bad, because of rising inflation, it looks to come and will have to be tolerated.

If governments would not have printed up so much debt money for political and other reasons, inflation would not be as much of an issue. But because many have, stagflation is more and more seen as likely.

Notice the following:

What is Stagflation?

Stagflation is an economic event in which the inflation rate is high, economic growth rate slows, and unemployment remains steadily high. Such an unfavorable combination is feared and can be a dilemma for governments since most actions designed to lower inflation may raise unemployment levels, and policies designed to decrease unemployment may worsen inflation. accessed 03/02/22 https://corporatefinanceinstitute.com/resources/knowledge/economics/stagflation/

So, stagflation is inflation without growth.

But that is not the only problem, increased interest rates will lead to increased debt as well for the USA. One day this will cause a destructive vicious circle that the US economy will not get out of.

I warned earlier this year about the prospect of stagflation (see Supply chain, inflation, stagflation?).

We now look set for at least some of that to happen.

This will harm many in the USA and around the world.

Furthermore, Jerome Powell pointed to a policy that will harm the USA:

Fed Chief Powell Says It’s Possible to Have More than One Reserve Currency in the World – Diminishing the US’s Dominance in the World

March 2, 2022

Jerome Powell is planning on raising interest rates this month from the zero percent that Democrats have benefitted from in the White House this century. …

Fed Chief Jerome Powell also shared the potential to have more than one reserve currency in the world. This is a shocking statement coming from the head of the Fed.

The US has benefitted from having the reserve currency of the world. https://www.thegatewaypundit.com/2022/03/fed-chief-powell-says-possible-one-reserve-currency-world-diminishing-uss-dominance-world/

Sure it is possible to have more than one reserve currency, but the current order is highly benefiting the USA. The economic ramifications of the USA losing its status are huge.

Another risk that the USA itself is facing is because of stopping Russian banks out of the SWIFT financial system (see US, EU, UK agree to remove selected Russian banks from SWIFT), Russia will feel forced to use more alternatives to the USA dollar for its international trade.

That, in turn, will reduce the international value of the USA dollar as the world’s premier reserve currency, and of itself, will also be a factor in inflation for those who live in the USA.

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