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Powell’s Quarter-Point Hike Call, Risks Fed Falling Further Behind Inflation Job -Breaking


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By Yasin Ebrahim – Federal Reserve chairman Jerome Powell confirmed plans this week to back a 25-basis point rate increase at the March meeting, but a quarter-point hike risks the Fed falling even further behind in its efforts to curb inflation.

“A 25 basis points rate hike at the March meeting would be a no decision as opposed to a decision … and it’s not going pull the handbrake on the inflation momentum that arguably is being further fueled [by the Russia-Ukraine conflict], Johan Grahn, head of ETF Strategy at Allianz told in an interview on Monday, ahead of Fed chairman Jerome Powell’s remarks earlier this week.

In testimony before Congress, Powell said he would support a 25-basis point, or 0.25%, rate hike in March, though added that he was “prepared to raise by more than that in a meeting or meetings” if inflation doesn’t subside later this year as expected.

Powell also flagged the “highly uncertain” impact to the economic outlook from the fallout of the Russia-Ukraine conflict.

The outcome of Ukraine’s crisis is uncertain, but the Fed has another job. This job is the dual mandate one. It aims to ensure stability in prices and maximize employment.

The Fed modified its framework to respond to inflationary and labor market changes in 2020.

Under this new framework, “employment is an important driver of policy decisions when there’s excess slack in the labor market, but it drops out completely once the unemployment rate dips below 4%…,” Jefferies said in a report earlier this year.

With the unemployment rate running below 4%, the Fed’s dual mandate has arguably become a one-dual mandate to curb the pace of inflation now running at a 40-year high of 7.5%.

Powell made this clear earlier in the week. The Fed has been slow to respond to rising prices, which is something the market knew for some time.   

Powell stated earlier in the week that “we would have engaged our tool earlier” after admitting that central bank expectations of supply-side problems dissipating at a quicker pace did not materialize. 

The Fed is stuck between two rocks in the aftermath of the Ukraine crisis, which threatens global growth.

An economy that is already slowing down due to red-hot inflation will be slowed by too high hike rates, increasing the chance of stagflation. But hike cautiously, and there’s little room for flexibility to save the economy in the event of significant a slowdown.  

“If you don’t have a way to treat the patient down the road … this could be in two, three, or maybe five years, it becomes really dangerous, and now we’re talking about a much longer secular type of [stagflation] problem.

“In my view, it’s so critical that the Fed stay on point as we are off an already delayed rate hike cycle,” Grahn added.

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