https://sputnikglobe.com/20230505/federal-reserve-should-seek-other-tools-than-lending-rates-to-fix-inflation-1110116740.html
Federal Reserve Should Seek Other Tools Than Lending Rates to Fix Inflation
Federal Reserve Should Seek Other Tools Than Lending Rates to Fix Inflation
Sputnik International
Economist and professor Mark Frost and media commentator and podcaster Mitch Roschelle argued that inflation will keep looking like a nail until Fed chiefs find another tool to control it than the hammer of interest rates.
2023-05-05T15:49+0000
2023-05-05T15:49+0000
2023-05-05T15:49+0000
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Raising interest rates will not control rampant inflation in the US but only put more banks at risk of collapse, say two finance experts.The US Federal Reserve bank announced its tenth monthly rate hike of 0.25 per cent on Thursday to 5.25 per cent, the highest level since 2007. But the previous increases have been blamed for instability in the banking sector that saw the collapse of Silicon Valley Bank and several more institutions.Mark Frost told Sputnik that conventional wisdom of raising central bank lending rates to deflate the economy would not work — and would only have more undesirable consequences. "They have two things that they have to watch out for right now," he warned. "One is bank liquidity, and there's lots of banks in trouble, there is at least 170 of them at least, and there might even be more." The Fed is in "reactive mode" and not really in control of the situation, the economist said."They're not going to fight inflation now on an ongoing basis," Frost said. "They're going to fight it as a leak shows up in the plumbing, they're going to take their pipe wrench and they're going to turn the valve and try to stop the leak."But the situation is too complicated to be solved by changing one economic metric, he pointed out."There's all these things going on on a financial basis that central banks don't know what to do with because they don't have control of those things," he stressed. "The only thing they have control of is a tiny little ceremonial rate that they can change. That's the bank overnight borrowing rate. The rest they have to manipulate by removing bank liquidity, creating a shortage in the market for loanable funds, which drives up rates."Mitch Roschelle told Sputnik that the Fed had to juggle the conflicting demands of its "dual mandate"."One thing that they're responsible for is keeping prices stable, meaning tamping down inflation when it rears its ugly head," he said. "The other thing is to strive for our economy to reach full employment."The good news for the US was that unemployment was low. The bad news was that soaring inflation was "very sticky and hard to deal with.""What they've been doing is they had just been buying a lot of mortgage backed securities and Treasury bonds that flooded the economy with money. Now they're undoing that, their fancy names for it that economists use like quantitative easing and quantitative siding. And the bottom line, what they're trying to do is contract the money supply."But the podcast host played down fears of a looming recession."As [Federal Reserve] Chairman [Jerome] Powell yesterday said in response to a question during his presser, If we have a recession, it will probably be short and not too severe. And the best indication of a recession... has been a spate of unemployment and layoffs," he pointed out. "But the labor market remains very, very tight, which doesn't suggest to me that there's a recession right around the corner."For more insights on this and other issues from our top commentators, follow our Telegram channel.If you enjoyed this article, check out our Sputnik Radio shows.
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Federal Reserve Should Seek Other Tools Than Lending Rates to Fix Inflation
Economist and professor Mark Frost and media commentator and podcaster Mitch Roschelle argued that inflation will keep looking like a nail until Fed chiefs find another tool to control it than the hammer of interest rates.
Raising interest rates will not control rampant inflation in the US but only put more banks at risk of collapse, say two finance experts.
The US Federal Reserve bank announced its tenth monthly rate hike of 0.25 per cent on Thursday to 5.25 per cent, the highest level since 2007. But the previous increases have been blamed for instability in the banking sector that saw the collapse of Silicon Valley Bank and several more institutions.
Mark Frost told
Sputnik that conventional wisdom of raising central bank lending rates to deflate the economy would not work — and would only have more undesirable consequences.
"The Fed doesn't know exactly what they need to be doing, so they're going to make it appear as if they're as as if they are tightening money when in fact... they're actually expanding it," Frost said.
"They have two things that they have to watch out for right now," he warned. "One is bank liquidity, and there's lots of banks in trouble, there is at least 170 of them at least, and there might even be more."
The Fed is in "reactive mode" and not really in control of the situation, the economist said.
"They're not going to fight inflation now on an ongoing basis," Frost said. "They're going to fight it as a leak shows up in the plumbing, they're going to take their pipe wrench and they're going to turn the valve and try to stop the leak."
But the situation is too complicated to be solved by changing one economic metric, he pointed out.
"Right this moment, there's so many moving parts, everything from the war in Ukraine to weird yield curves at home, to investors getting spooked to dollar deposits, moving out of banks to non-banks," Frost said.
"There's all these things going on on a financial basis that central banks don't know what to do with because they don't have control of those things," he stressed. "The only thing they have control of is a tiny little ceremonial rate that they can change. That's the bank overnight borrowing rate. The rest they have to manipulate by removing bank liquidity, creating a shortage in the market for loanable funds, which drives up rates."
Mitch Roschelle told
Sputnik that the Fed had to juggle the conflicting demands of its "dual mandate".
"One thing that they're responsible for is keeping prices stable, meaning tamping down inflation when it rears its ugly head," he said. "The other thing is to strive for our economy to reach full employment."
The good news for the US was that unemployment was low. The bad news was that soaring inflation was "very sticky and hard to deal with."
"They have two primary tools in their toolbox. One is to raise interest rates, and that's what they've been doing for ten consecutive months to a level we haven't seen since 2007. The other thing they can do is try other ways of contracting the money supply," Roschelle explained.
"What they've been doing is they had just been buying a lot of mortgage backed securities and Treasury bonds that flooded the economy with money. Now they're undoing that, their fancy names for it that economists use like quantitative easing and quantitative siding. And the bottom line, what they're trying to do is contract the money supply."
But the podcast host played down fears of a
looming recession."It's funny that the Fed originally, as did the Treasury Department, referred to inflation as being transitory. So if the Fed says we're heading into recession, maybe we won't it because their past performance isn't so great in terms of predictions," Roschelle said.
"As [Federal Reserve] Chairman [Jerome] Powell yesterday said in response to a question during his presser, If we have a recession, it will probably be short and not too severe. And the best indication of a recession... has been a spate of unemployment and layoffs," he pointed out. "But the labor market remains very, very tight, which doesn't suggest to me that there's a recession right around the corner."
For more insights on this and other issues from our top commentators, follow our Telegram channel. If you enjoyed this article, check out our Sputnik Radio shows. 
