US Federal Reserve hikes rates, to take out US$95bn a month to tame Powell bubble
ECONOMYNEXT – The US Federal Reserve has hiked rates 75 basis points to 3.25 percent and pledged to suck out 95 billion US dollars in liquidity from the banking system from September in bid to reign in a commodity bubble that has pushed up energy and food prices around the world.
“My colleagues and I are strongly committed to bringing inflation back down to our 2 percent goal,” Fed Chief Jerome Powell told reporters.
“We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”
The Federal Reserve lost control of inflation after printing large volumes of money to generate ‘jobs’ in the worst policy error since the Greenspan-Bernanke bubble that burst in 2008, triggering a global downturn.
Inflation is now at levels seen in the early 1980s, when then Fed Chief Paul Volcker corrected policy errors of Arthur Burns which led to the collapse of the Bretton Woods and the end of a centuries old gold standard.
Like some developing country central banks and Burns himself, Powell in 2021 blamed non-monetary causes such as ‘supply chain’ claiming inflation would be ‘transitory’ while classical economists warned that money supply was growing at unusually high levels.
The Fed said it will also sell down its Treasuries by 60 billion US dollars a month and agency debt another 35 billion US dollar a month to reduce liquidity in banks.
However the tightening comes amid an unusual slowdown in the US official M1 and M2 money supply numbers and steeper than announced fall in reserve balances through its open market operations to defend its earlier policy, indicating a higher level of ‘quantity tightening’ than announced.
Bubbling food commodity prices have reduced access to food to less affluent individuals around the world.
Countries in Africa, Latin America and Asia with bad soft-pegged central banks which also printed money during the Coronavirus crises but did not raise rates to contain domestic credit has seen collapsing currencies and near starvation of their populations, which is quaintly referred to as ‘food insecurity’.
Stable pegs which did not collapse in the 2018 tightening exercise of the Fed including Vietnam are seeing pressure as US rates go up. Bangladesh Taka which cut rates in 2021 amid a post-Covid recovery is already tanking.
Many African currencies have tanked and price controls have taken food off the shelves.
