Following the latest interest rate increase by the US Federal Reserve, leading economist forecasts the annual inflation rate until the end of 2023
The Federal Reserve, the USA’s central bank, increased interest rates by 25 basis points last week to combat excessive inflation despite the ongoing banking crisis. In an expected move, the central bank of USA raised interest rates by only a quarter point following the recent collapses of Silicon Valley Bank and Signature Bank. Since March 2022, the US Fed has raised interest rates nine times in a bid to curb inflation.
Many experts are not very optimistic about the US economy and believe that this year’s rate hikes from the Federal Reserve and financial problems will cause a recession.
Steve H Hanke, an eminent economist and professor of applied economics at Johns Hopkins University, told ET Insights that monetary policy is not about interest rates; it is about the money supply. “So, what has been happening with the money supply, a metric that the Federal Reserve ignores? It’s been contracting at an unprecedented rate. In the last 12 months, the money supply (M2) has contracted by 2.2 percent. The U.S. hasn’t witnessed this kind of monetary squeeze since the 1930s. As a result, a recession is baked into the cake,” stated Hanke.
“As far as inflation is concerned, the Fed seems unlikely to ease off contractionary policies—in part because the central bank wrongly focuses on the Phillips curve, which portrays inflation and unemployment as contrary forces. Seeing a tight labor market, the Fed says it anticipates upward inflation pressures to persist through 2023, so quantitative tightening and high interest rates will remain in place until further notice.”
Professor Hanke, who served on President Reagan’s Council of Economic Advisers, went on to add that he and economist John Greenwood were decreasing their projection for the annual inflation rate at the end of 2023 from 5% to between 2% and 5%.
In a wide-ranging interview with ET Edge Insights in February this year, Steve H. Hanke explained how the huge increase in money supply between February 2020 and February 2022 led to a surge in the stock market and a boom in the US economy. He said after the economic stimulus, a period of exceptional money supply contraction took place, and then we had a substantial inflation rate of over 9% by mid-2022.
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