Fed rate hikes and inflation

Fed officials raised interest rates by 50 basis points this month in an attempt to suppress inflation at its highest level in 40 years and said they would raise rates by another 50 basis points at their June and July meetings, with balance sheet cuts just around the corner.

The Fed hopes to calm runaway inflation through two magic weapons: interest rate hikes and balance sheet reductions. High inflation has angered Americans, hollowed out their wallets, and hurt Biden’s approval ratings.

According to a recent white house statement, the president will convene Fed Chairman Jerome Powell for talks in the Oval Office on Tuesday to discuss U.S. and global economic conditions, with inflation at the forefront.

U.S. financial markets have been shaken violently in recent weeks, with investors fearing that the Fed’s aggressive tightening of policy could trigger a recession, while inflationary pressures have dimmed corporate profit outlooks and led to a series of thunderstorms in retailers.

Fed officials hope they can achieve a soft landing while cooling inflation without causing a sharp rise in unemployment. The U.S. unemployment rate is now at 3.6 percent, close to a 50-year low.

Waller said he is confident he can do this because labor demand levels are very high and the Fed’s tightening policy will only slightly raise the unemployment rate.