Federal Reserve chairman Jerome Powell dashed investors’ hopes again last week, provoking a fierce sell-off after warning the Fed “had a long ways to go” on interest rates.
Stocks rallied hard in the weeks leading up to last week’s Fed meeting, but Powell made clear hopes of a near-term pivot were just wishful thinking, saying “challenging” inflation data meant rates must go even higher than he expected just six weeks ago.
There are no shortage of commentators warning the Fed is being too aggressive in its battle with inflation. “Why are you doing this, Fed Chair Powell?”, was the title of a note from UBS chief economist Paul Donovan last week. Piper Sandler’s Roberto Perli, a former senior official at the Fed, says Powell should slow the rate hikes “in the interest of not completely wrecking the economy”.
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However, others say the Fed’s tough medicine is necessary. Former US treasury secretary Larry Summers has repeatedly likened interest rates to a course of antibiotics; if you stop too early, the infection comes back and is trickier to manage.
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“The only previous time we dedicated monetary policy dominantly to avoiding recession was the disastrous 1966-81 period”, cautions Summers. Then, the Fed paused too soon on multiple occasions, resulting in persistent inflation.
Summers’ take is that, once generated, high inflation is “very hard to stop”. Powell appears to share that assessment, meaning weary investors will just have to put up with more tough medicine.
