Congress and the Federal Reserve Could Be Setting Us Up for Economic Disaster
In the final week of 2022, we Americans can foresee two significant economic risks in 2023. The first one is a probability that the Federal Reserve will get weak-kneed and stop raising interest rates before inflation is truly under control. The second risk is that Congress will continue to spend and borrow money irresponsibly. The likely mix of these two hazards would all but ensure that our economic misery lasts much longer than necessary.
Let’s start with the first risk. In theory, to tame inflation, the Fed will need to push real interest rates not only high—as it has already done—but higher than the highest rate that the Fed is now targeting, and in fact much higher than most investors can remember. Such high rates will have two main effects: popping the stock market and real estate market, along with any other asset bubbles that we’ve witnessed in recent years. The economic downturn that would follow would increase unemployment rates significantly.
On the other hand, if the Fed stops tightening too early, we will continue to suffer high inflation and slower growth. The rise in unemployment might be pushed back for a while, but because no inflationary policy can continue forever, it will inevitably arrive. And the longer we delay its arrival, the worse it will be. Unfortunately, in the face of such challenges, I worry that Fed Chair Jerome Powell will not make the better (and more difficult) choice and hold the line on inflation.
First, the pressure that he already faces from, for example, Sens. Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.) to stop raising rates will only intensify as the economy slows down and the unemployment rate increases.
Second, as i
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