The Federal Reserve has raised its benchmark Fed Funds target to a 5.00% to 5.25% target at its May meeting that concluded today. Today’s move marks the Fed’s 10th hike since the beginning of 2022 at a 0 to 0.25% target, as the Fed fights the inflation that it created itself by leaving rates too low for too long in order to inject liquidity into the market through out the pandemic.
The Fed said that inflation remains elevated and it remains highly sensitive to inflationary risk. The Fed’s statement said that it is still determining whether additional policy firming will be appropriate.
Those analysts who have been hoping for a pivot in the Fed’s policy are again disappointed. Chair Jay Powell indicates that he remains prepared to raise rates as high as necessary and to keep them there as long as necessary in order to fight inflation.
The idea that inflation is some sort of a passing post-pandemic feature of the economy is increasingly looking less likely. Many economists believe that shortages in supply, especially the supply of labor, in the post-pandemic world will continue to be manifest in the form of upwards pricing pressure for an indefinite period.
Most recently, the end-of-April extreme heat wave in Portugal and Spain, where temperatures reached over 40 Celsius (over 100 degrees Fahrenheit) and resulted in price increases all across Europe of key economic staples (wheat, corn, etc.) has finally lead many economists to predict that the climate catastrophe that we are now entering globally will cause such a disruption in agricultural powerhouse regions like Spain that we could see inflation for generations.
Under any case, it seems early to assume that we have inflation under control and naïve to assume that it will remain under control for long.
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