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Gasoline prices are displayed at a gas station on February 8, 2022 in Los Angeles, California.

mario tama | Getty Images

People tired of paying higher prices for just about everything shouldn’t expect help from the Federal Reserve anytime soon.

Even though the central bank is set to embark on an inflation-fighting strategy, the impact won’t be felt for months or more, economists say.

This is because the Fed cannot order prices to fall. All he can do is tighten the money supply and believe things are going well from there. The central bank is doing this through interest rate hikes, which are expected to begin in March and ultimately drive down the cost of living.

“What it will do is it will limit the persistence of price increases,” said Joseph Brusuelas, chief economist at RSM, an accounting service. “The expectation we should all have is that the action the Fed takes today won’t really be apparent until the fourth quarter of this year and all of next year.”

The anticipation of Fed action comes as the latest reading of the consumer price index, which measures the cost of dozens of everyday goods and services, rose 7.5% during of the last year in January. It’s the fastest rise since 1982, when the economy faced stagflation and a double-dip recession.

Prices have gone up everywhere. In December alone, cereals rose by 1.8%, ham by 2.5% and prices for fresh fish jumped by 2.4%. This is in addition to continued increases in food, energy and housing.

In order to fix the problem, markets expect the Fed at its March meeting to raise benchmark borrowing rates by at least 0.25 percentage points, or even double. Wall Street thinks the Fed will raise rates at least five more times before the end of 2022.

But monetary policy works with a lag, which means it takes time for rate movements to circulate through the economy. Economists believe it takes six months to a year before these efforts really take effect.

“The Federal Reserve can’t do anything about the current surge in near-term inflation,” Brusuelas said.

Over the longer term, however, rate hikes have proven to be an effective means of curbing inflation.

‘A matter of time’

The way it works is that higher rates make it less affordable to borrow money, which slows down credit. At the same time, the higher cost of money affects the dollar, increasing the value of the US currency and providing consumers with greater purchasing power.

If it feels a bit squishy, ​​there’s a reason for it. The Fed has no direct way to reduce the cost of a loaf of bread at the grocery store or a fast food hamburger or even a gallon of gas, which has become 40% more expensive over the past few years. last 12 months.

There’s another problem: it’s not your garden variety inflation cycle, which is usually driven by big credit jumps. Instead, much of the current situation is due to unprecedented injections of cash coming directly from the federal government through pandemic-related payments to households, and indirectly from the Fed and the amount of money it injected into the economy through loan programs and cash, as well as near-zero short-term interest rates.

“We are in an asset cycle, not a credit cycle,” said Steven Blitz, chief US economist at TS Lombard. “The inflation we see is a function of these one-time injections of equity into households and small business balance sheets. The money has been spent, and it has been spent at a time when the ability to meet that demand was limited.”

Indeed, until recently, Fed officials used the word “transitional” to describe inflation driven by pandemic-related factors such as rising demand for goods relative to services and chain-linked constraints. supply triggered by the spread of Covid.

But the price increases have turned out to be more aggressive and long-lasting than policymakers had expected.

After months of viewing inflation as a passing phase, Fed officials must now take delayed action that will fuel the economy, but through indirect channels.

“The only way for the Fed to slow this down is to have a stronger dollar that lowers the cost of imports,” Blitz said. “This not only reduces the cost of imports, but also increases the cost of producing goods outside of the United States, which reduces the demand for labor.”

The conundrum for the Fed will be to make sure the cure isn’t worse than the disease, that its inflation-fighting rate cuts don’t falter the economy and hurt people at the bottom of the income scale that aggressive political spending was intended to help.

“Can the Fed bring inflation down? Yes, it absolutely can,” Blitz said. “But the question is, what happens next? It’s a matter of time.”