Working in front of the head when the Fed tightens monetary policy
The healthy economy of US banks, corporations and households, trumpeted during the pandemic by Federal Reserve officials as a source of resilience, can be an obstacle to fighting inflation as central bankers raise interest rates in an economy that is so far unable to pay the price.
By outlining their aggressive turn towards tighter monetary policy, Fed officials say they hope to crack down on the economy without ruining jobs, with higher interest rates slowing things down enough for companies to scale down the current high number of vacancies while avoiding layoffs or a tough on household income.
But this means that the pain of inflation control must mostly fall on capital owners via a reduced housing market, higher corporate bond yields, lower stock values and a rising dollar to make imports cheaper and keep domestic producers down.
Economists, including current and former Fed officials, note that unlike previous Fed rate hike cycles, there is no obvious weakness to exploit or the asset bubble to burst to quickly make a dent in inflation ̵[ads1]1; Nothing like the highly overvalued housing markets in 2007 or the hypervalued internet stocks of the late 1990s to give the Fed more bang for its expected rate hikes.
Adaptation to tighter Fed policies has been rapid with some measures. But it has been moderately spread across a number of markets, none catastrophic, with little impact yet on inflation or consumption.