The current inflation situation hasn’t been about all goods in the economy getting more expensive at the same rate. Specific goods – food, fuel, cars and housing – have been experiencing massive price shocks, raising the general inflation level substantially. Controlling these changes would require aggregate demand to shrink to unbearable levels for average Americans – essentially making people too poor to buy goods, and thus alleviating bottlenecks. Rate hikes are not only ill suited to bring down these essential prices but risk a recession throwing millions out of work.
Raising interest rates to tame demand — and therefore inflation — is not the right solution, as high prices have been driven mainly by supply chain shocks, one analyst said.
Global manufacturers and suppliers have been unable to produce and deliver goods to consumers efficiently during Covid lockdowns. And more recently, sanctions imposed on Russia have also curtailed supply, mainly of commodities.
On September 22 the Bank’s Monetary Policy Committee (MPC) raised rates by 0.5 percentage points to 2.25%.
Speaking at the G30 annual international banking seminar, Mr Bailey said: ‚The UK Government has made a number of fiscal announcements and has set October 31 as the date for a further fiscal statement.‘
He said that the Bank’s monetary policy committee ‚will respond to all this news at its next meeting in just under three weeks from now‘.
With inflation still climbing, today the Bank of England has brought out the big guns, raising interest rates by 0.25 percentage points to 1.25 per cent – pushing the cost of borrowing to its highest since February 2009. It joins the US Federal Reserve, its cousin across the Atlantic, which yesterday raised rates by 0.75 percentage points – its biggest rise in almost 30 years.
That means a monthly mortgage payment on a roughly median-valued $400,000 home, after a 20 percent down payment, would now be $1,874. Last year, the monthly payment on the same home would have been $1,335 — a difference of more than $500.
President Biden on Thursday said that a recession is not inevitable in the wake of the Federal Reserve’s decision to raise interest rates at the quickest pace in nearly 30 years.
“First of all, it’s not inevitable,” Biden told The Associated Press in an exclusive interview. “Secondly, we’re in a stronger position than any nation in the world to overcome this inflation.”
Each rate hike means higher borrowing costs for consumers and businesses. And each time would-be borrowers find loan rates prohibitively expensive, the resulting drop in spending weakens confidence, job growth and overall economic vigor.
“There’s a path for us to get there,“ Powell said Wednesday, referring to a soft landing. „It’s not getting easier. It’s getting more challenging”
It was always going to tough: The Fed hasn’t managed to engineer a soft landing since the mid-1990s.
Using the Federal Reserve’s rule of thumb that for every $1 loss in wealth, households reduce spending by 4 cents, the decline in asset prices to date will almost certainly result in consumers cutting back spending.
Such a prospectively large decline in consumer spending is the last thing that an already slowing US economy needs. This is especially the case at a time when consumer spending is already being constrained by sky high gasoline and food prices.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” the FOMC said in a statement announcing the interest rate hike.
For the European Central Bank, which is meeting Thursday to discuss monetary policy, the stronger euro is yet another headache. The bank’s Governing Council is not expected to make any changes to its stimulus program, which is already enormous.
Collectively, the ten largest U.S. banks expanded by more than $1.2 trillion in the first quarter of 2020. JPMorgan alone grew by nearly 20 percent, becoming the United States’ first bank with $3 trillion in assets. The bank took in $273 billion in new deposits in just three months. That’s equivalent to JPMorgan acquiring PNC Bank — the country’s seventh largest depository institution.
On March 25th, The Senate voted to pass the 3rd coronavirus relief package based on the proposal from Mitch McConnell and Senate Republicans that features, among other provisions, a nearly $500 billion slush fund that would be controlled by Treasury Secretary Steve Mnuchin. Mnuchin, who is best known for making millions off running a notorious foreclosure mill, would be able to direct corporate bailouts with limited, after-the-fact oversight. This is absolutely unacceptable.