The Cost of Taming Inflation Will Be Exorbitant
The Fed has encountered little pushback to its tightening campaign, but that will likely soon change as the fiscal impact of higher rates becomes clearer.
The government’s interests costs are rising rapidly.
Photographer: Luis Robayo/AFP via Getty Image3s
At the start of the year, the issue affecting markets the most was the Federal Reserve’s reluctance to acknowledge the problem of faster inflation. That changed recently when Chair Jerome Powell accepted the need to make fighting inflation priority number one. Although the markets breathed a sigh of relief, what wasn’t acknowledged was the cost of this policy.
As the Covid-19 stimulus and supply problems raised inflation rates to levels not seen in decades, Wall Street pressured the Fed to aggressively tighten monetary conditions. There was even talk of Paul Volcker-like rate hikes. With unemployment near the lowest level of the past 50 years, some traditional measures like the Taylor Rule indicate the target federal funds rate should be anywhere from 7.5% to 10% higher, instead of the current range of 1.50% to 1.75%. Financial markets cheered when the Fed changed its messaging from “inflation is transitory” to “we will not allow a transition from a low-inflation into a high-inflation environment.”