Brace yourselves, high interest rates are here to stay – for now.
This was the message Federal Reserve Vice Chair Lael Brainard had for the United States economy.
Speaking at an event in New York, Jerome Powell’s likely successor purported that inflation is hurting low-income Americans the most (though Paul Krugman claimed that inflation only hurts the rich). As a result, more rate hikes are necessary and keeping them there for longer than initially anticipated is crucial.
“We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further,” she said.
“With a series of inflationary supply shocks, it is especially important to guard against the risk that households and businesses could start to expect inflation to remain above 2 percent in the longer run, which would make it much more challenging to bring inflation back down to our target,” she said.
Ultimately, despite watching the data closely, Brainard believes that restrictive monetary policy will need to be intact “for some time” to instill enough confidence that inflation is falling.
“The economic environment is highly uncertain, and the path of policy will be data dependent,” Brainard added.
Financial markets widely anticipate that the Eccles Building will pull the trigger on a 75-basis-point rate hike at the September Federal Open Market Committee (FOMC) policy meeting, according to the CME FedWatch Tool.
The U.S. annual inflation rate stands at 8.5 percent and it could potentially fall below eight percent in the August consumer price index (CPI) report released next week amid plunging commodity prices.
But if the U.S. economy slips into a deep recession, how could the Fed keep the benchmark fed funds rate elevated?
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