The Cost of the Fed’s Challenged Credibility
After previously eschewing interest-rate hikes, the US Federal Reserve has been tightening monetary policy at an unprecedented rate. But the current market turmoil and the central bank’s own revised projections show that a great deal of damage has already been done.
CAMBRIDGE – Financial markets’ reaction to the US Federal Reserve’s latest policy move was reminiscent more of developing countries than of the world’s most powerful economy. Given that the Fed is the world’s most systemically important central bank, this is more than just a curiosity. It has implications for America’s economic well-being – and that of the rest of the world.
On September 21, the Fed reinforced its two-month-old “HFL” approach of pushing interest rates higher, faster, and for a longer duration than previously anticipated. It implemented an unprecedented third successive 75-basis-point rate increase and sent a strong signal that hikes totaling another 125 basis points are on tap for the year’s last two policy meetings. It also signaled that the possibility of a “pivot” to lower rates is unlikely before 2023.
The Fed’s revision of its economic projections painted a darkening picture for the United States and most other economies. It is forecasting not only lower growth but also, and more surprisingly, higher inflation – something that it has done repeatedly in recent quarters.
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