The Week in Review: March 21, 2021
Liftoff: The Federal Reserve Starts to Tighten the Screws
In a widely anticipated move, the Federal Reserve raised its key lending rate, the fed funds rate, by 25 basis points (bp, 1 bp = 0.01%) to 0.25–0.50% at its Wednesday meeting. The Fed forecast six more 25 bp rate hikes at its remaining meetings this year, per its Summary of Economic Projections. This would put the fed funds rate at 1.75–2.00% by year-end.
The Fed’s pivot is complete. Last year, the Fed let the economy run hot and dismissed worries about inflation. Today, the Fed is raising interest rates, hoping to cool down the economy and bring inflation under control.
During the press conference that followed its meeting, Fed Chief Powell said he believes the economy is strong and can handle seven rate hikes this year.
More importantly, he repeatedly emphasized “price stability.” In fact, it was a term that he repeated 24 times during his press conference.
But with the war in Ukraine and the spike in oil and various commodity prices, the Fed’s job has become more complicated.
Channeling Paul Volcker
Paul Volcker served as Fed chairman between 1979 and 1987. Under his leadership, the Fed raised rates sharply to get inflation under control, but the action came at a cost—a steep recession in 1981-82.
How aggressive might the Fed become as it hopes to re-establish its inflation-fighting credibility? Seven projected rate hikes this year and an additional three to four projected hikes in 2023 are simply that, projections.
Much will depend on how the economic outlook unfolds.
But Powell may have provided a hint during testimony before a Senate committee last month.
Powell acknowledged, “We should have moved earlier,” a rare admission by a Fed chairman.
When asked if he would go as far as Volcker did to get inflation under control, Powell said, “I knew Paul Volcker… I think he was one of the great public servants of the era, the greatest economic public servant of the era. And I hope that history will record that the answer to your question is yes.”
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
Due to concerns over Russia’s supply, nickel prices shot up as much as 250% in two days. On Monday, March 7, the Chinese firm Tsingshan Holding Group took a paper loss of $8 billion because they were short nickel futures. —Morning Brew, March 9, 2022
In the past 20-plus years, 21 of the 25 worst trading days were followed within a month by one of the 25 best trading days. —Shareandstocks, March 8, 2022
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