Imagine, for just a moment, you’re an economic policymaker tasked with managing the path of an economy. Now envisage a set of economic conditions that makes your task near-enough impossible. That, unfortunately, is where many real-life policymakers find themselves today. There’s too little growth but there’s also too much inflation. The former typically demands interest rate cuts. Doing so, however, simply threatens more by way of inflation. The latter typically requires interest rate increases. Going down that path, however, may trigger a recession.
For its part the Federal Reserve has already made clear its primary fear. By raising the key US interest rate by a further three-quarters of a per cent last week, the Fed appears determined to return the US economy to “price stability”. As Jerome Powell, the Fed’s Chair, stated following this latest tightening of monetary policy, the Fed is “strongly committed to bringing inflation back down” and “moving expeditiously to do so”. Strong stuff, particularly when there’s evidence that the US economy is shrinking.
