Powell says US can handle tighter policy, will that be the cure for inflation?

Last week the Fed raised the interest rate by .75%, the biggest hike in three decades. Federal Reserve Chairman Jerome Powell said the hike is necessary to rein in skyrocketing inflation. During his testimony on Wed, Powell said that the Fed plans to continue raising rates until proof of inflation slowdown is clear. Will tight monetary policy be the cure for inflation? 

Stocks have gyrated in recent weeks as soaring inflation and slowing growth concern hang over markets. Investors and corporate executives are worried that the recession has hit consumer confidence, hence will lead to a hard landing on monetary policy. The table below shows recent comments from corporate executives and former government officials.

Recession fears weighed on worsening economic data and recent news:  

-U.S. home sales slid as prices broke above $400k for the first time 

-Retailers, such as Target, are slashing prices to get rid of excess inventory 

-Tech companies, such as Coinbase, started to layoff or freeze hirings 

Can we conclude that the Fed tightening has led to recession in the U.S. economy?

Fed tightening might be a direct result for higher lending rate, which will in turn negatively affect the housing market. However, inventory management and tech companies’ layoffs are less directly linked to rate hikes. Recession is more likely a self-fulfilling process that occurs when more people are convinced that the economy is slowing down. The Fed is aggressively hiking rates and implying more to come, which will, without doubt, further decrease economic activities by increasing the cost of capital. 

Powell believes hot inflation should be tamed through decreasing demand. However, it is the supply shortage, including that of energy, products, and workers, that caused prices to rise. Cutting down money supply to subside consumer demand is just like to get rid of cold symptoms using chemo — which kill healthy cells while attempting to solve the problem. Furthermore, the public is encouraging this overaggressive monetary policy by blaming Fed for consumer prices, which hit a 4-decade high.

#2. Biden calls for federal and state governments to temporarily suspend gas taxes 

• A suspension of the 18.4-cents-a-gallon federal gasoline tax and 24.4-cents-a-gallon diesel tax through September would require congressional approval.

• If the gas savings were fully passed along to consumers, people would save roughly 3.6% at the pump when prices are averaging about $5 a gallon nationwide.

• The initiative faces bipartisan resistance. Republicans widely oppose lifting the tax while Speaker Pelosi made no commitments on bringing the matter to vote.

#3. US house sales fell for fourth consecutive month in May, with median home price hitting all-time high

• Residential property sales have reached their lowest point since May 2020, driven by a 12-year high 30-year fixed mortgage rate and surging house prices.

• Despite the decline, properties currently stay on the market for a record average low of 16 days due to a short supply. 88% of homes sold last month were available for less than 30 days.

#4. Bitcoin falls below $20k during the weekend; Musk spurs “meme coin” rally; ProShares announces bitcoin short ETF

• Bitcoin fell below $20k twice this week during trading over the weekend and Monday, reaching an 18-month low of $17,601.

• Musk doubled down on support for Dogecoin. During a conference on Tuesday, the billionaire described how he bought and supported the currency. Dogecoin saw a brief rally on Wednesday.

• ProShares launched a bitcoin short ETF (BITI) on Tuesday, 8 months after the establishment of its first US bitcoin futures ETF. It is the third such product to hit global markets since April of this year as crypto experts predict winter for the asset class.

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