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The Fed Is Overreacting

If the US Federal Reserve continues to hike interest rates in large increments, as Fed Chair Jerome Powell recently suggested, economic growth, financial markets, and people’s well-being will suffer. It won’t be pretty – and it won’t be right.

ITHACA – At this year’s Jackson Hole symposium, a major event on the calendars of the world’s central bankers, US Federal Reserve Chair Jerome Powell delivered an uncharacteristically strong message about how the Fed plans to combat today’s high inflation.

The Fed raised interest rates sharply, by 75 basis points, in both June and July, but Powell made it clear that the rate hikes are unlikely to stop there or even to taper off. Instead, he said, “unusually large” rate increases will continue into the near future. The coming hikes will hurt US households and businesses, but “a failure to restore price stability would mean far greater pain.”

Powell’s hawkish remarks caused the S&P 500 to fall by 3.4%, with every sector of the index declining. Many fear that if the Fed continues to raise interest rates in large increments, as Powell suggested, investment will plummet and unemployment will rise. In fact, aggressive monetary tightening would cause the economy, financial markets, and people’s well-being to suffer excessively. Like an overdose of steroids, it may cure the illness but at a disproportionately high cost.

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