Monetary tightening, inflation and bank failures

Michael Roberts Blog

Last week, US Fed Chair Jay Powell gave testimony to the US Congress on inflation and Fed monetary policy.  He spooked financial markets when he appeared to say that the latest data on the economy would probably require further interest-rate hikes and at a faster pace.  Powell argued that although the headline inflation rate had fallen back, the ‘core’ inflation rate, which excludes energy and food prices, remained ‘sticky’.  Also, the US labour market still seemed exceptionally strong, justifying the need to control the impact of any wage rises.  He again suggested that it would be necessary to hike further the Fed’s policy rate (which sets the floor for all other borrowing rates) until wage costs came under control.

Once again, Powell, like other central bank governors, claimed that inflation was being driven by ‘excessive demand’ and also by the risk of rising wages causing a ‘wage-price’ spiral.  But there…

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