Fed ‘lost a lot of credibility’ by not raising rates sooner: strategist

Fed 'lost a lot of credibility' by not raising rates sooner: strategist

The Federal Reserve announced it would raise its target range for the benchmark federal funds rate to between 0.25% and 0.50% last Wednesday as part of a long-awaited move to tackle inflation, which has been high since decades.

The move is long overdue, Michele Schneider, partner and director of trade research and education, told Yahoo Finance Live in a recent segment.

“I think it should have happened by now, quite honestly,” she said. “I think they should have been less worried [with market fallout]especially as we have seen an increase in the market, during the summer and late fall of 2021.”

Last year was a more favorable environment for rate hikes, Schneider said, and signs of significant inflationary pressures were already present in economic data.

“That was probably the first opportunity because at that time, even though oil wasn’t necessarily going crazy, we could see it in industrial metals, we could see it in food prices, and so they have in kind of missed that first level,” she said. noted. “And so at this point now, I think they’ve lost a lot of credibility.”

U.S. Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing on ‘The Semi-Annual Report on Monetary Policy to Congress,’ in Washington, U.S., March 3, 2022. Tom Williams/ Pool via REUTERS

The Fed had made it clear that it would raise interest rates in 2022 as soon as November last year, when CPI reports showed inflation exceeding 6%. Fast forward to February this year, when the US saw a year-over-year rise in consumer inflation of nearly 8%, the highest rate of increase since 1982. .

Talk of anticipated interest rate hikes has emerged among the public as well as at least one Fed official, St. Louis Federal Reserve Chairman James Bullardwho suggested raising the Fed’s short-term borrowing rate by a full percentage point by July.

Anticipated interest rate hikes in the first months of the year could allow the Fed to control inflation more effectively, but could lead to more serious fallout on the markets.

Such drastic measures may be justified if they can cause prices to rise quickly, Schneider said. In fact, she added, slower rate hikes might not be effective at all.

“If they go up half a percent, it might not even be taken seriously at this point,” Schneider said. “It certainly should have hurt certain areas, obviously, and in particular, as we are seeing now with mortgages in the housing sector. But overall, I think the Fed at this point, unless they get even more aggressive on their rate of change in terms of how quickly they raise rates, that would be something to watch. But they seem to stay relatively slow.

The S&P 500 (^GSPC) rose Thursday morning, continuing a mostly positive week for the stock index after the Fed’s announcement. The Dow Jones Industrial Average (^DJI) also rose 0.7% in Thursday morning’s trading session as investors factored in the potential impact of Russia’s extended sanctions and rate hikes. of the Federal Reserve on the markets.

“Atypical period” for the economy

It is certainly a curious time for the economy; while fundamentals appear strong, many headwinds – including tighter monetary policy and rising energy prices – point to an impending recession.

“That disconnect gave us a rally from the lows to about the middle of where we were at the highs,” she added. “And it’s sort of a normal type of rally at this point.”

Whether or not rising interest rates will lead to a recession is hard to say, Schneider said, but a labor market still struggling to fill vacancies puts the current economy in an atypical position.

“I’m counting on a couple of things because we’re in an atypical period, having come out of COVID,” she said. “The first, of course, is the fact that we have a labor market as such where usually in a recession you will start to see a lot of layoffs. And we have a situation where we still have 10 million jobs to fill. And of course, part of our supply chain issue is that a lot of people haven’t returned to work yet, especially in transportation or trucking.

Historically low unemployment insurance claims can provide protection against the high levels of unemployment typically seen in recessions, should they occur. However, even that observation depends on several factors, Schneider said, including the magnitude and speed with which rates are rising.

“I think what we’re going to see here is maybe another drop, but at some point, that kind of trading range or that floor,” she explained. “And if we have some sort of recession, it would be very short-lived and, again, stagflation, which can last much longer.”

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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