And that brings us to the Federal Reserve Bank which is charged with balancing inflation against unemployment. The Fed has taken very aggressive action against inflation recently, raising the Federal Funds rate by 0.75% at the June meeting, the biggest hike in 28 years. And it is expected that at the July meeting the Fed will hike another 0.75%.
In fact, Fed Chair Jerome Powell has recently been rather emphatic about extinguishing inflation, even if it risks a recession. In testimony to Congress on June 22nd, Powell made some rather frank comments. “It’s not our intended outcome (a recession) at all, but it’s certainly a possibility… We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to stamp out inflation… “We’re looking for…compelling evidence that inflation is coming down, and we don’t have that”. Then on the 29th of June, Powell made equally forceful remarks at the European Central Bank’s annual economic policy conference. “Is there a risk we would go too far? Certainly there’s a risk… The bigger mistake to make—let’s put it that way—would be to fail to restore price stability…. because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.” “There’s a clock running here.”
So let’s take the positive view here. Manufacturing is hanging tough. The unsustainably hot housing market is starting to cool off. Personal consumption is still growing. And the Fed is unsheathing its “terrible swift sword” against the scourge of inflation.