Thursday/ a roller-coaster ride 🎢

‘Without price stability, the economy does not work for anybody, really’
– Fed Chair Jerome Powell at the Federal Reserve’s news conference yesterday


Wow. We ride the rollercoaster. Up yesterday, the stock market sold off in a big way again today (Dow -3.1%, S&P 500 -4.6%, Nasdaq -5.0%).

Inflation is still very high, and the Fed is finally raising interest rates.
(The Fed funds rate is now 0.75-1.00% after yesterday’s 0.5% raise).
A range of 2-3% is considered neutral, and time will tell if the Fed will have to go above that to bring inflation down to 2%.

Chairman of the Federal Reserve Board, Jerome Powell, addressing reporters face-to-face for the first time since the pandemic began. The Fed has the tools to control inflation (1. interest rates, 2. the Federal Reserve’s balance sheet and 3. their communication, usually called ‘forward guidance’), but the tools are blunt, and affect the broad economy as a whole.
[Still from Wall Street Journal video recoding]
Inflation is very high, and not showing signs of moderating yet. This graph shows the famous Consumer Price Index (CPI), a basket of goods and services that includes prices from the food & energy sector. The annual Core Inflation rate excludes food & energy prices, but was also very high for March 2022: 6.5%.
[Graphic from Yahoo Finance]
The Fed Funds rate was more or less in its ‘neutral’ range of 2-3% (not stimulating nor restricting economic activity) before the pandemic hit, but was then cut to 0-0.25% when the economy went into free fall in Mar. 2020. Dark gray bands show recessions. The tricky thing for the Fed to do is to raise interest rates (to tame inflation), without triggering a recession in the economy.
[Graphic from Yahoo Finance]

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