Why I don't think the Fed will back off

The pushback against rate hikes is unlikely to succeed.

In recent weeks we’ve seen the beginnings of a pushback against the Federal Reserve’s interest rate hikes. The rumblings had been mostly confined to Twitter and cable news, but a few days ago the United Nations Conference on Trade Development released a report warning the Fed to turn back. They write:

The Trade and Development Report 2022 warns that monetary and fiscal policy moves in advanced economies risk pushing the world towards global recession and prolonged stagnation, inflicting worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020…Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble.

At a time of falling real wages, fiscal tightening, financial turbulence and insufficient multilateral support and coordination, excessive monetary tightening could usher in a period of stagnation and economic instability for many developing countries and some developed ones.

UNCTAD is a serious agency, so their words do carry weight. On social media, of course, the anger at the Fed is far less measured, with some accusing America’s central bank of wanting to hurt the economy and hurt American workers;

Max Kennerly @MaxKennerly

Hot take: the Fed does not want to appear independent. The Fed wants to appear responsive to the preferences of Wall Street. Even better if doing so causes damage to everyone else. To them, widespread economic harm is a feature, not a bug.

Noah Smith 🐇🇺🇦 @Noahpinion

So the more you shout at the Fed to stop tightening, the more adamant they will be about tightening. Because if they ease up in the face of popular backlash, it means they're not really independent. And central banks prize the appearance of independence very highly.

JW Mason @JWMason1

Powell wants workers to have less bargaining power, and employers to have more. If you're anywhere on the left politically, it shouldn't be hard to decide how you feel about this.

Nick Bunker @nick_bunker

Jay Powell is fist pumping at that job openings number.

These accusations are obviously bogus — the Fed obviously doesn’t like recessions (as demonstrated by its aggressive easing in the Great Recession), nor does it want to see workers disempowered. But the frustration is understandable — we are not used to seeing our own central bank clobber the economy.

But despite this frustration — and UNCTAD’s warnings — I don’t expect the Fed to ease up. There are two basic reasons for this:

1. In important ways, the Fed’s policy is still pretty loose, and

2. The Fed is worried about bigger dangers than the kind of recession that gets caused by rate hikes.

So I think we should all be prepared for rates to keep going up.

In some sense, the Fed is still on Team Transitory