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Monday, September 26, 2022

Citizens And Businesses Lose Faith In Feds Ability To Handle Inflation Even As Stimulus Check Dry Up And Prices Go Through The Roof

With federal stimulus checks drying citizens and businesses are particularly peeved at the incompetence of the Federal Reserve is handling the economic crisis. The Fed too committed a series of missteps as it delayed too long to tackle headlong the greatest rise in inflation in 4 decades.

In the face of repeated errors in forecasts, Fed officials have been forced to frequently revise their projections for the economy and resort to a radical alteration in their forward guidance in the past few months. It is gradually becoming apparent that frequent monetary policy missteps contributed majorly to the once-in-a-lifetime inflation rise.

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This has caused the Fed to lose credibility among citizens and businesses, especially as they have been left without the cover of a stimulus check which saved them during the pandemic-induced economic crisis during the past two years.

After the committee meeting this May, Chairman Powell gave a clear indication that a 50-basis point rate hike was to be penciled in for the following two months. Yet there was a leap in consumer inflation. The Consumer Price Index jumped last week and the Fed was forced to revise the policy rate by 75 basis points on June 15.

Even more confusing was the June 22 economic projections summary  (SEP) that indicated that the Federal Reserve had drastically overhauled its forecasts from just 3 short months back.

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With its abysmally poor record of forecasting, the Fed has to make fundamental changes in its approach. It needs to undertake some serious investigations regarding the reason for its total failure.

Consumer Sentiment At New Low As People Hit Hard Due To Absence Of Stimulus Checks

 Even more perturbing for the administration is that people have lost confidence in their ability to rein in the rate of inflation. Consumer sentiment is at its lowest since the 1980s. Most citizens anticipate worse times and have accordingly adjusted their spending trends. This could spell further trouble for the economy and can lead to a surge in prices.

Federal Reserve policymakers are facing enormous pressures to reduce inflation without causing more job losses or slowing down the recovery rate. The most difficult part is that it is now unclear if the Fed has any other trick up its sleeve other than increasing the rate of interest to a level that leads to a deep recession on the level seen in 2008.

Getting Back The Public Trust

Getting back the trust of the people and businesses will depend on the next move the Federal Reserve makes this week. The most recent and gloomy inflation report suggests the possibility of the Fed considering a much more aggressive stance of 3 quarters of a percentage point. It appears to be their only solution to show the urgency and rein in the killer inflation. It will turn out to be the severest increase after 1994.

The Fed Chairman said that they need to bring down inflation convincingly and quickly, and they would do everything till they get there.

But convincing the common people, businesses, and lawmakers will be a different ballgame altogether. They will need some effort to convince them that they can act with sufficient power and still not lead to a rise in unemployment, or push the economy over the precipice of recession.

The Effect Of The Stimulus Check And Other Factors Affecting The Fragile Economic Condition

The Federal Reserve concentrated on the labor market, determined to get it back to the pre-pandemic stage. They resolved to keep supporting it for as long as necessary. They kept interest rates near zero, determined to keep it that way till they saw clear signs of recovery.

They went for the concept of ‘maximum employment,’ the concept where there was a job waiting for all who wanted it. They also did not believe that inflation would become so big a problem and were willing to compromise on prices to get people back in the workforce.

President Biden’s huge relief bill, the American Rescue Plan Act found Federal Reserve support as the latter did not believe that a surge in the job market would result in too much inflation. Powell contended that the job market had still to improve.

It led to the outsized impact of the pandemic on the supply and demand balance. The third stimulus checks tagged with the extended unemployment stimulus checks and the enhanced child tax credit stimulus checks all fortified the public’s power to spend. But the insatiable demand was thwarted by a supply chain collapse that led to a huge shortage in supply. Inflation followed.

Factors Other Than The Stimulus Check

It wasn’t just the stimulus checks and the insistence on stabilizing the job market that led to the situation. The war in Europe upended the prediction of the Fed as the global energy market went into a tizzy with sanctions put on the world’s third-largest producer of oil.

Despite the Fed raising interest rates by a record half a percentage point, the highest in 2 decades, the prices of gas continued to climb and inched towards $6 per gallon. The same goes for grocery prices as the food index crossed the 10% mark for the first time since 1981. Home rents too slowly increased and continued to rise in May.

Consumer behavior caused by the distrust of the Fed has further complicated matters. People are stocking up fearing further increases which are making the shortage more severe.

People are not willing to believe that raising rates will solve the issue. Small business owners say that instead, the government needs to fix the supply issue and clear bottlenecks at ports, and move to bring down shipping and transportation costs.

The common citizen meanwhile says that only more stimulus checks can save them from the immediate crisis and states have moved ahead with legislative measures to give residents multiple financial support.

Stimulus checks in the form of direct payments, gas and transit cards, tax rebates, and cuts in taxes are the slew of measures being considered by states. Some states like Maine have already passed legislation and the first round of stimulus checks have been paid. It remains to be seen what further influence these relief measures have on the inflation rate.

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