Will the Federal Reserve Follow Through?

Last week, the Federal Reserve raised interest rates 0.5%, committed to shrinking its balance sheet, and said it remains “highly attentive to inflation risks.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504a.htm

What a change from November 2021 when we were told inflation is “transitory” by the same Fed policy makers. As I wrote back then, it was obvious that they were not living in the real world like the rest of us that had been facing inflation in our businesses and personal lives for over a year. It is good that they finally acknowledge that inflation is, indeed, out of control. The first step in solving a problem is recognizing you have a problem. 

Now that the Fed has recognized our inflation problem, the big question is: will it have the intestinal fortitude to follow through on its promise to curtail inflation? We are entering an interesting time. Stimulus payments to individuals and businesses have ended. While there is talk of handing out more money to deal with inflation (A brilliant strategy. NOT.), it appears like the days of free money are over, at least for now. Call me crazy, but the idea of handing more money out when there is too much money chasing too few goods seems ridiculous. Supply chain challenges persist as a result of China’s lockdowns and a lack of workers. Rising interest rates are impacting the housing market. Add it all up and we have the makings of an economic slowdown. The Fed usually loosens monetary policy when things are slowing down.

I will be shocked if the Federal Reserve stays the course and continues to increase interest rates throughout the year. If I were a betting man, I’d take the under on the number of interest rate hikes we have. Economic data will start showing a slowdown in the near future. The Fed will curtail its tightening.