With inflation already at 40-year highs before Russia invaded Ukraine, the pressure is growing more intense on the central bank.
The Federal Reserve is walking a tightrope heading into this month’s meeting, made all the more difficult by the Russian invasion of Ukraine, the Action Alerts Plus team argues.
The recent “February Flash PMI data showed a rebound in inflationary pressures [for industry and producers] and renewed efforts to pass those increasing costs on to customers,” AAP wrote. “The next few weeks are going to be a tightrope of sorts, especially for the Fed as it looks to balance fighting inflation with not putting the economy fast pass to an economic tailspin or recession.”
Recession has become one of the low-key watchwords in recent weeks.
The U.S. economy has been a story of highs and lows since early 2021. At time of writing, job growth continues at one of the fastest levels on record and wage gains have been equally strong. Simply put, the data suggests that now is one of the best times to get a well-paying job in living memory. (Although we’ll point out that actual job seekers tell a very different tale, one where unanswered cover letters and extreme demands are the norm.)
At the same time, inflation continues at its highest rate since the Reagan administration. Consumers accustomed to stability are seeing the prices they pay climb ever higher, including across nondiscretionary sectors like food and energy.
In response to inflation the Federal Reserve has discussed raising interest rates, which AAP expects at its March meeting. This is a textbook response to combatting inflation. Higher interest rates make money more expensive, reducing the amount of it in the consumer market, which in turn reduces the pressure on prices.
Yet at the same time, economists warn that the Federal Reserve has a difficult job ahead of it. Higher interest rates are designed to “cool off” the economy, a bloodless term for making consumers modestly poorer so businesses charge them less. If the Fed gets its numbers right, prices will go down and the economy will benefit. If the Fed goes too far, it can spark a self-sustaining spiral of poorer consumers, who can’t spend money at businesses, which then start cutting wages and work, making consumers poorer still.
Getting that balance right is critical, and it’s why investors and economists alike have their eyes on the Fed’s next move.
