In a continuing effort to quell inflation through reducing aggregate demand, the Open Market Committee (FOMC) of the Federal Reserve, the body that dictates monetary policy, raised its target Federal Funds rate by 0.75% to 3.00%. This marked the third consecutive 75 basis point increase and the fifth overall. The prior two hikes were 50 and 25 basis points on May 5 and March 17, respectively.
Furthermore, in a policy known as Quantitative Tightening (QT), in addition to raising rates the Fed has increased the amount of U.S. Treasuries and Mortgaged-Backed Securities they will let sunset monthly to $95 billion, a further headwind to economic growth.
Within the policy statement released immediately after the two-day meeting, the Fed observed that “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and ware weighing on global economic activity. The committee is highly attentive to inflation risks.”
Fed Chair Jerome Powell reiterated these hawkish tones during the ensuing Press Conference, noting that “my colleagues and I are strongly committed to bringing inflation down to our 2 percent goal. We have both the tools we need and resolve it will take to restore price stability on behalf of American families and businesses.”
The above paragraphs represent the Fed’s blunt instruments within their toolbox available when adjusting the pace of economic growth. They include adjustments to interest rates, purchasing or selling debt of the U.S. Government and jawboning.
We are quite concerned that after pursuing a historically loose monetary policy far beyond what in hindsight proved necessary, in an effort to balance supply with demand, the Fed is now continuing to stomp on the brakes of an already slowing economy. Unfortunately, the Fed has little impact on the international supply chain or upon the war levied upon Ukraine by Russia. This therefore leaves the bulk of their efforts surrounding the destruction of demand.
Look no further than the twenty percent year-over-year decline in the Sales of Existing Homes or the fourteen percent decline in issuances of Building Permits as evidence of the slowing of what was a red-, too-hot housing market. A slowdown was indeed appropriate. That said, perhaps the Fed has gone too far. Enough is enough.
We believe that it is time to relax the jawboning and begin to measure the impact of the policy adjustments to the economy rather than to rush headlong into further demand destruction thereby risking a hard landing.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it
also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
