Econometer: Is the Federal Reserve correct in considering additional rate hikes?

Despite a falling inflation rate, Federal Reserve Chair Jerome Powell recently stated in a speech that the central bank would fight rapid inflation “until the job is done.”

While inflation has been decreasing, he stated that officials want to see more progress to be convinced that they are truly controlling price increases.

“We are prepared to raise rates further if necessary, and we intend to maintain policy at a restrictive level until we are confident that inflation is moving sustainably lower toward our target,” he said.

Raising interest rates, critics argue, stifles economic growth, and the Fed’s current strategy isn’t working.

Q: Is the Federal Reserve correct in thinking about more rate hikes?

Franklin Revere, Jamie Moraga

YES: Additional rate hikes may be necessary if higher prices for goods and services are reduced and inflation returns to the 2% target. To avoid over-tightening and worsening our economic situation, the Fed should be cautious in raising rates. They should also make certain that high interest rates are not extended, as this can affect mortgages, credit cards, and loans (including personal, student, auto, and business loans), resulting in long-term economic consequences.

San Diego State University’s David Ely

YES: While inflation has slowed in recent months, common measures of headline and core inflation remain above the Fed’s target of 2%. Labor markets remain relatively strong, and the likelihood of a recession has decreased, both of which could keep prices rising. It is best if the Fed does not rule out another rate hike. This stance demonstrates the Fed’s firm commitment to returning inflation to its target.

SANDAG’s Ray Major

YES: Raising interest rates is one of the few tools available to the Federal Reserve to control inflation. Maintaining a target of 2% or less is critical for people to build and sustain wealth. The Federal Reserve should act and do everything possible to achieve that goal. Furthermore, cutting some of the $5 trillion in annual spending would help the country reach the target even faster and without requiring additional interest rate increases.

Caroline Freund, School of Global Policy and Strategy, University of California-San Diego

YES: When the economy is booming, a key principle of good monetary policy is to tighten. Despite signs of cooling, the economy remains quite hot, with unemployment at 3.5 percent and a consumer spending spree that continues to surprise on the upside. The Fed wants to avoid going too far, too fast, and causing the United States to enter a recession. Hikes, on the other hand, would be overly restrictive right now. The correct approach is to monitor the incoming data, act if necessary, and retrain credibility.

San Diego Institute for Economic Research’s Kelly Cunningham

YES: The Fed should keep raising interest rates because inflation is still present, the US credit rating was recently downgraded (for the second time in history), and the US’s status as the world’s reserve currency is under threat. According to Henry Hazlitt, “inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit.” The resulting inflationary boom results in obvious bad investments. Corrections and adjustments are required for healthy economic activity to fully resume.

Phil Blair, Human Resources

YES: Regrettably. Price stability is required to maintain strong labor market conditions in the future. The Fed is attempting to strike a balance between doing too much and doing too little. Too little action may allow high inflation to become entrenched, necessitating a strong monetary policy to combat persistent inflation at a high cost to employment.

London Moeder Advisors’ Gary London

NO: I believe it is time to pause interest rate hikes. Hiring is down, economic growth is down, and inflation, while not at the targeted (and possibly unnecessary) 2 percent level, is significantly lower. The economy has cooled to more desirable levels, muting concerns about inflation for the time being. We are not in a slump. However, gas and grocery prices appear to be the most inflated, and this remains the source of consumer dissatisfaction.

Alan Gin, University of California, San Diego

NO: The category “Rent of Shelter,” which is up 7.8 percent year on year, is one of the biggest contributors to inflation. Given its weight in the Consumer Price Index, that category accounts for 2.7 percent of current inflation. If that is removed, the inflation rate falls within the Fed’s target range. According to some economists, higher interest rates contribute to rental inflation by forcing potential buyers to rent rather than buy. Rents may also be raised by landlords to cover higher financing costs.

R.A. Rauch & Associates, Bob Rauch

NO: The Fed should maintain current interest rates as inflation has fallen from a 40-year high last summer. Raising interest rates further increases the risk of a recession, as previous increases have weakened the economy. Borrowing will become more expensive and difficult for businesses and individuals. The most prudent course of action is to wait and see what effect all of the record increases to date have had.

University of California-San Diego’s James Hamilton

YES: But I hope they don’t have to go through with it. Monetary policy changes take time to have an impact on the economy. As a result of the Fed’s actions beginning last year, inflation has been decreasing. If inflation continues to fall, no further rate increases are required. However, if inflation does not continue to rise, the Fed will be forced to consider another rate hike later this year.

Austin Neudecker works for Weave Growth.

NO: The full impact of their previous rate increases has not yet been realized. In terms of controlling sentiment, I believe signaling that the Fed is willing to do more rate hikes is prudent. However, I hope that they only carry out the threat if the economy experiences sustained or rising inflation. I’d rather have a few percent more inflation for a few months than a recession and job losses.

Scripps Health’s Chris Van Gorder

YES: There are parallels between today’s environment and the late 1970s, when we had to decide whether to fight inflation with higher interest rates or to give up. Back then, the Fed cut short-term interest rates in response to promising preliminary data. Within a year, inflation had risen to nearly 15% per year, forcing the Fed to raise interest rates even further. Powell’s emphasis on avoiding a “second wind” in inflation is unfortunately supported by historical precedent.

Norm Miller, University of California, San Diego

NO: The Federal Reserve is overly fixated on an arbitrary 2% target, as if it were a magical fulcrum of a balancing act. Inflation is decreasing, and Powell admitted that real estate has a lag effect on the CPI, which will almost certainly bring the measure down, closer to the target, in the coming months. While the economy is doing well this year, job openings are rapidly declining, and we should be concerned about over-tightening.