![]() By raising interest rates, the Fed makes it more expensive to borrow money. So to tackle the inflation problem, Powell led the Fed on an all-out assault on high prices, raising the central bank's key interest rate from 0% in March 2022 to 4.5% as of December, a pace of hikes not seen in three decades. High inflation eats away at consumers' purchasing power, and persistent inflation seeps into expectations for price and wage adjustments, which further fuel inflation. The consumer price index - the most widely watched measure of inflation - peaked at 9.1% in June, the highest level since 1981. There is no doubt that inflation needed to be conquered. ![]() The opportunity for a soft-landing scenario is still on the table, but Powell's efforts to protect his reputation in the history books could backfire - and end up pushing the US economy into an unnecessary recession. "Powell doesn't want his name to go down in infamy," he said. Gagnon, a senior fellow at the Peterson Institute for International Economics and a former Federal Reserve Board associate director, told me that Powell is willing to do everything he can to avoid becoming known as the central banker that let inflation get away. While downturns and recessions are seen as part of the normal business cycle, letting inflation become ingrained in the economy is a once-in-a-generation sin that can stain the reputation of a central banker in the history books. This obsession with controlling inflation - and potentially causing serious pain for average Americans - is driven by one major factor: legacy. Powell has emphasized his willingness to cause short-term economic pain to bring down inflation, and economists at several major Wall Street banks believe that the Fed's commitment to interest-rate hikes means recession is now the most likely outcome in 2023. So far, however, there is no sign that the Fed is going to hit the brakes in a meaningful way. But in order to achieve this outcome, many experts believe Powell and the Fed need to pause their aggressive interest-rate hikes. ![]() ![]() The Fed's ideal scenario in the months ahead is to orchestrate a so-called "soft landing," where inflation comes back down to their target level without causing a corresponding surge in unemployment or even a recession. Account icon An icon in the shape of a person's head and shoulders. ![]()
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