New York, USA (CNN)– The idea of a three-quarter percentage point rate hike by the US Federal Reserve wasn’t on the list earlier this year, but in just a few months that big jump has become the norm, and almost certainly will. Jerome Powell’s standing as Paul Volcker sealed the current decade.
The Federal Reserve made history, Wednesday, as it agreed to raise interest rates for the third time in a row by 75 basis points. The Federal Reserve is once again trying to counter inflation by using its most powerful and broadest force, which is to control the cost of corporate and individual borrowing of money.
The benchmark lending rate is now at its highest level since the 2008 global financial crisis.
So here’s what you need to know:
The move towards a 75 basis point rate hike was widely expected.
– But markets fell anyway due to the belief that the next Fed meeting will include another 75 pips rise and then another 50 pips rise. This is now 25 basis points more than Wall Street had expected.
All three major US stock indexes fell immediately after the Federal Reserve’s announcement. Then I tried to go back, but fell back again. It was a wild afternoon.
– What does all this mean for ordinary people? Sorry to say, but the “pain” the Fed chief warns about is mostly pain for lower- and middle-class people, who are more likely to be laid off, their wages and hours go down, and they have trouble paying off their high-interest credit card debt. Mortgage rates that are already more than double what they were a year ago will continue to rise as well.
One of Powell’s biggest critics, Senator Elizabeth Warren, was quick to tweet condemning the “drastic” increase, which the Fed itself predicts will raise the unemployment rate from the current 3.7% to 4.4%, a loss of more than a million jobs.
step back
To understand the Fed, it helps to understand Powell.
In his role as Federal Reserve Chairman, Powell has made no secret of his admiration for Paul Volcker, whose name is practically synonymous with fighting inflation at all costs, even if it leads to the economy’s recession. That is exactly what Volcker, the former Federal Reserve chairman, did twice in the early 1980s.
Testifying before Congress in the spring, Powell described Volcker as a hero, saying he was “the greatest economic public servant of the era”.
Part of the reason Powell and others remember Volcker so favorably is that it requires an intelligent mind and the ability to make strong decisions to:
A – Understand the problem of rampant inflation.
B – Implementation of traumatic shock therapy for the high interest rates that cost millions of people their jobs.
Volcker’s plan worked, but it really took a while, and there was already some pain, Powell said.
Inflation is now the highest since Volcker ran the Fed, and the central bank itself is facing a crisis of credibility for not acting fast enough to keep price hikes in check.
Credibility was a major concern for Volcker, too.
The bottom line: Powell continues to pull from Volcker’s playbook, meaning he is unlikely to hesitate to work towards the Fed’s 2% inflation target, lest the central bank’s credibility take another blow. Only time will tell whether the 40-year-old playbook is still applicable in an economy fundamentally different from the one that Volcker encountered.