I don’t want to be in Federal Reserve chair Jerome Powell’s chair. Whether the Fed continues to raise interest rates or not, Powell will be blamed for a recession that is almost inevitable at this point.
The savings accumulated by Americans during the pandemic and the money given by the government in various ways (stimulus, loan forbearance, tax credits) are gone, and the country is—once again—drunk on credit.
So much credit that credit card debt is close to $1 trillion and, according to Stansberry Studymortgage credit grew at an annual rate similar to the years leading up to the financial disaster of 2008.
The problem is that the Fed started raising interest rates more than a year ago when it realized that years (if not decades) of Fed-induced easy money had finally led to inflation to take. Inflation is seen in other parts of the economy but prices take time to directly affect all consumer goods. Now, with households drowning in debt, the prospect of new interest rate hikes to break the inflation rate is still close to 6% officially (while in real life many important things are experiencing much higher which increases in price) is scary.
Many politicians have warned the Fed against continuing its anti-inflationary policy—but inflation hurts consumer finances as much as overindebtedness (the two are related), put Mr. if you don’t.
According to a Bankrate report, more than a third of households have more credit card debt than savings for emergency situations. Almost 70% would not be able to pay a month’s living expenses if they lost their main source of income. The number of people who are at least two months late in making their car loan payments has increased by 20% compared to last year, according to Cox Automotive. Clearly, American consumers, who were forced by the Covid lockdown to remember what it was like to save money, decided, once the economy opened, that they would not be affected again. After all, they are running out of money–from their forced savings and various forms of fiscal and monetary stimulus.
All of this leads to one conclusion: American consumers will stop buying soon, and many US corporations and small businesses will suffer. The idea that you can wash away the excesses of the economy—of which excessive credit and inflation are symptoms—with just one year of interest rate hikes is ludicrous.
Recessions are the inevitable way to clear excesses and get back on track. The US economy has been living in la-la-land for a long time. The conundrum in which the Fed finds itself is the result of four decades of easy credit and, therefore, excessive debt and excessive spending, a large part of which was facilitated by the Federal Reserve itself.
The Fed would do well to remember this now that it is under a lot of political pressure.
The Fed should continue to reduce its crazy balance (at least $ 95 billion per month, as in recent months) and raise real interest rates. They are still in negative territory when you factor in inflation, meaning they are far from where they need to be to restore some clarity to the monetary system and economy.
Just look back at the legendary Paul Volcker years (1979-87) at the Fed. He inherited a stagnant economy, accompanied by high inflation – “stagflation.” And it took a sharp rate hike and a tough recession for the economy to regain health in early 1986, more than six years after Volcker assumed the Fed’s helm.
Hanging over the current economy, of course, is the next presidential election. There’s never been a good time for politicians to accept—and endorse—the hard realities of economic life, especially when populism has such a strong presence in both political parties and is likely to have a significant impact. role of primaries.
If the economy tanks in the coming months, Powell will be to blame. If we avoid a recession, the politicians will take credit.
Álvaro Vargas Llosa is a senior fellow at the Independent Institute. His latest book is Global Crossings: Immigration, Civilization and America.
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