Posted by Jason Lyons.
Financial analysts are forecasting up to seven rate hikes in 2022, an increase from five hikes. We can anticipate the first rate hike, a 50 basis point increase to the Federal Funds Rate during the March FOMC meeting. Why has the Fed become “hawkish” recently?
Quantitative easing during COVID and supply chain crises have led to record inflation. Consumer price index (CPI) data for 7.5% year over year increase, hitting a forty year high. The Federal Reserve has two goals: unemployment and price stability. With the stock market and real estate markets hitting record highs, as well as a strengthening labor market, the Fed can shift from its unemployment goals to curbing inflation. The Forbes article argues that the Fed is “lags” inflation and should have taken “decisive action last year” (Conerly). The Fed waited until inflation got “hot” before reacting where they should have acted while stimulating the economy to prevent the current situation, we are in.
Why seven rate hikes? The Fed has eight FOMC meetings per year, and recently concluded that inflation is no longer transitory, and the purchasing of Treasuries and Mortgage-Backed Securities will end in March (was originally ending in summer 2022). We could see the remaining seven Fed meetings to have a 25-basis point increase, and the article argues a larger 50 basis point move is not out of the question. By raising rates, debt becomes more expensive and increases yields which stops the economy from overheating and lowers inflation. The long-term Fed inflation goal is 2%. Seven rate hikes would help maintain this 2% goal. The second half of 2022 may see moderately higher than normal inflation only if the Fed takes these actions. On the other hand, if the Fed does not act quick enough, inflation can get out of hand, and we may see double digit inflation.
I agree that the Fed has been too cautious. However, the Delta and Omicron variants led to uncertainty in 2021 and the possibility of another lockdowns. The Fed did not want to end expansionary policy too quickly in the event we relapse and see a second March 2020 stock market crash. Only hindsight shows whether the Fed was correct or not. One concept I disagree with was the Fed maintaining that inflation is transitory. Car prices and commodities like wood and steel have stagnated since the summer, but energy and food have continued to increase, proportionately affecting lower income families more.
Jason is a Fin-Tech major at the Stillman School of Business, Seton Hall University, Class of 2024.