Early Monday, Lael Brainard, the Vice Chair of the Federal Reserve, claimed that the central bank raising the rate targets of the federal funds will end up having some fairly extreme effects on overall economic activity.
The target interest rates jumped by 0.75% this last month as a result of decisions from policymakers, a plan which kicked off in the wake of two identical hikes in both June and July, in an effort to help disperse a bit of the elevated inflationary pressures. Brainard issued a warning throughout the conference held in Chicago that the overall economic growth will end up being “essentially flat” over the course of the second half of this year.
“The moderation in demand due to monetary policy tightening is only partly realized so far. The transmission of tighter policy is most evident in highly interest-sensitive sectors like housing, where mortgage rates have more than doubled year to date and house price appreciation has fallen sharply over recent months and is on track to soon be flat,” explained Brainard. “In other sectors, lags in transmission mean that policy actions to date will have their full effect on activity in coming quarters, and the effect on price setting may take longer. The moderation in demand should be reinforced by the concurrent rapid global tightening of monetary policy.”
The 30-year fixed mortgage rate continued to sit at below 3% for a good majority of the previous two years. As reported in data gathered by Freddie Mac, a government-backed mortgage company. Since the start of the year this year, the rate has jumped from just above 3% to a staggering 6.7% as of this past week — seeing an over 1% jump over the course of only five weeks.
The Federal Reserve first pegged an almost zero target interest rate and acquired government bonds in order to try and stimulate the economy throughout the lockdown-induced recession. Quite a few leading economists have called out the central bank throughout the return to a contractionary monetary regime, making the claim that officials who were lax in their responses to the increasing price points over the past two years are now causing some hefty harm to the public as a result of their extreme zeal in fighting inflation.
“Monetary policy will be restrictive for some time to ensure that inflation moves back to target over time,” stated Brainard. “It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down.”
In an intense speech issue just over two months ago, Federal Reserve Chair Jerome Powell claimed that policymakers still want to cut inflation down to about 2%, the rate largely maintained by the central bank for the past thirty years, and heavily emphasized that the group needs to set back up its mandate to take responsibility for stable inflation.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” warned Powell. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
