Reuters reports the Federal Reserve will most likely hike interest rates for the sixth time in 2022. Additionally, it’ll be the fourth consecutive 75-basis-point increase, boosting the rate from 3%-3.25% to a 3.75-4% range. However, multiple top economists and institutions agree that the Federal Reserve rate hikes are a costly mistake.
Federal Reserve rate hikes could result in a “totally avoidable” recession.
Allianz financial services’ chief economic advisor, Mohamed El-Erian, said the Fed made two significant mistakes on CBS’s Face the Nation. The first was misconstruing inflation as “transitory” or temporary; the second was remaining passive once they realized their first mistake. According to El-Erian, because the Fed didn’t proactively combat high inflation last year, we could experience a “damaging” recession. “[U]nfortunately, this will go down as a big policy error by the Federal Reserve,” said El-Erian.
He reiterated that the Federal Reserve’s passivity could be the final nail in the coffin. Because they waited to hike interest rates, the Fed has a two-fold roadblock of record-level inflation and restoring credibility. But, again, if the Fed had been proactive about combating inflation in 2021, this imminent recession could have been “totally avoidable.”
El-Erian’s sentiments echo other top economists.
El-Erian is just the latest economist to question the Federal Reserve’s decisions. Several other economists agree that the Fed took too long to act and is now overcorrecting its mistakes. “They are responsible for the inflation by being way too accommodative and way too late in their beginning of the tightening,” said Wharton professor Jeremy Siegel. “[A]nd then I believe that they are going overboard in the other direction […].”
The Washington Post reports Harvard economist and former economic advisor to the Bush administration, Greg Mankiw, agrees with Siegel. He compared the Fed’s job to stabilize the economy to that of a helmsman of a large ship. “It moves very slowly, and once you return the helm to normal, it keeps going,” Mankiw said. In other words, overcorrecting a previous mistake could make matters worse.
Bank of America says the Feds’ mistakes could cost hundreds of thousands of jobs next year.
The one silver lining of the recent economic turmoil is that the job market has held firm. CNN reports that the unemployment rate at publication is about 3.5%, the lowest since the late 1960s. However, Bank of America warns the Fed’s “war on inflation” will cost 175,000 American jobs per month next year. According to Bank of America head economist Michael Gapen, unemployment could hit as high as 5.5% in 2023.
