(TruthandLiberty.com) – The Federal Reserve controls America’s currency and the prime interest rate. As inflation continues to rise under President Biden and the power of the dollar dwindles, consumers are losing confidence. The Federal Reserve has noted the inflationary spiral and realizes now is the time for action. Consequently, the central bank held a closed-door meeting on February 14 to discuss when and how to begin raising interest rates.
The session may have been behind closed doors, but reports after the meeting indicated what Federal Reserve members discussed. All members are keenly aware of the US’s more than 7% rise in inflation and the Fed’s long-standing market policy to defend conditions to maintain no more than a 2% increase. To that end, St. Louis Federal Reserve President James Bullard proposed raising interest rates more aggressively and more quickly than initially proposed. The meeting took place under expedited procedures for the Board of Governors to review, determining the advance and discount rates the Federal Reserve Banks will charge.
Members of the Federal Open Market Committee agree they should increase interest rates in the face of inflation. Some members have been more aggressive in terms of raising their rates. Bullard insisted on an interest rate hike of one full percentage point. Others called for 50 basis points or half a percentage point increases. Many other officials asserted that a 0.25% increase would likely be enough.
San Francisco Federal Reserve President Mary Daly mentioned history serves as a teacher, showing aggressive and abrupt changes can destabilize prices and economic growth rather than improve them as intended. Bullard remains adamant the Federal Reserve needs to be forceful after allowing inflation to thrive over the last four months.
Americans and Inflation
In January, the Consumer Price index depicted a 7.5% increase in inflation over the previous year, the highest year-on-year increase since 1982 and well beyond what Wall Street predicted. Strong inflation gains don’t tell the whole story because incomes have declined due as inflation outpaced pay raises. Bullard claims the current inflation rates are bad for low- to moderate-income households. He added the situation isn’t ideal, citing a drop in consumer confidence and happiness.
Bullard said the Federal Reserve needs to reassure the market and defend its target, getting inflation back to 2%. Yet, it’s difficult to say how a change in interest rates might impact the economy. With price escalation seemingly out of control, the Federal Reserve will likely increase interest rates to discourage borrowing and encourage saving, slowing the economy down and decreasing inflation. Yet the Fed also wants to tread carefully to avoid overcorrecting, which could shock market growth to a stop and result in a recession.
The Board of Governors committed to meeting in March again to revisit the issue. We’ll keep you updated on this developing story.
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