United States: the Fed in the hot seat

And now, the yo-yo. On Wednesday 5 May, the Federal Reserve raised its key rates by half a point, the first increase of this magnitude since 2000; Wall Street soars, with the Dow Jones index posting its strongest gain since May 2020. The next day, no news from the US central bank; the Dow Jones loses more than 1,000 points, its worst tumble since 2020. Illogical? Symptomatic, rather: the stock market no longer knows where to turn, and it is not the only one. Will the Fed succeed in bringing down inflation? If so, will it do so at the cost of a recession? Has she completely missed the mark? Will she pull off a soft landing for the economy?

Monetary policy is not an exact science, but we have rarely seen so much uncertainty hanging over the American economy. And it’s been a long, long time since the all-powerful Fed found itself in the hot seat, with two questions that keep coming back: has it failed? Will she succeed? The two questions are linked, as past credibility determines that of the months to come.

Regarding the recent past, Jamie Dimon, CEO of JPMorgan Chase, believes the Fed has been “a bit late” in raising interest rates. Others are more categorical. But whose fault is it? On the side of the accusation, we find economists like Larry Summers, former economic adviser to Barack Obama, who was one of the first to sound the alarm about the danger of inflation. “Based on our assessment, overheating measures – such as strong demand growth, shrinking inventories and rising wages – have started to play out in the economy throughout 2021. But a new operational framework adopted by the Fed in August 2020 prevented it from acting until sustained inflation became apparent,” he wrote with Alex Domash, another Harvard economist, in an op-ed published by the site “The Conversation“.

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