Jerome Powell is prolonging our economic agony

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Can we all agree that the Fed­er­al Reserve has a plan to com­bat run­away infla­tion? They do. Chair Jerome Pow­ell has all but admit­ted it. After tem­per­ing his com­ments before pre­vi­ous rate hikes, allow­ing wig­gle room which gave way to mar­ket rebounds, Pow­ell has left no bones about this one. It is nec­es­sary to wreak some hav­oc on the econ­o­my and put down­ward pres­sure on the labor mar­kets and wage increas­es to stop the creep of infla­tion. Whether you buy into that log­ic or if you believe — like Elon Musk — that such move­ments could result in defla­tion — doesn’t matter.

All that mat­ters is what those vot­ing on the rate hikes believe, and there’s plen­ty of evi­dence that they won’t stop until the rate is over 4%. Wednesday’s rate increase of 75 basis points only moves us in that direc­tion. This is the third such adjust­ment of 75 basis points, and we’ve been all but told that it wouldn’t be the last. While these rate hikes have been his­tor­i­cal, they pro­long the eco­nom­ic pain asso­ci­at­ed with them. It’s time for the Fed to be bru­tal­ly hon­est about where the econ­o­my is and where it is heading.

Jerome Pow­ell has said that he aims to give the econ­o­my a soft land­ing. How­ev­er, he’s also said, “Our respon­si­bil­i­ty to deliv­er price sta­bil­i­ty is unconditional.”

Except that the soft land­ing he’d like to attain is some­thing from a sci­ence fic­tion nov­el. It is some­thing that those fol­low­ing the sit­u­a­tion don’t believe. For­mer Fed­er­al Reserve Bank of New York Pres­i­dent William Dud­ley admit­ted as much, say­ing, “They’re going to try to avoid reces­sion. They’re going to try to achieve a soft land­ing. The prob­lem is that the room to do that is vir­tu­al­ly non-exis­tent at this point.”

Relat­ed: The mar­ket isn’t surg­ing any­time soon — so get used to dark times

Cleve­land Fed­er­al Reserve Bank Pres­i­dent Loret­ta Mester, one of the 12 who vot­ed on the rate hike, has joined Pow­ell, stat­ing that the Fed will need to raise the rate to over 4% and hold it there. Only one ques­tion remains, and it isn’t where the inter­est rate will end up. The ques­tion: Why does the Fed insist on drag­ging out the pain?

There’s no ques­tion that a rate hike of 150 basis points would gen­uine­ly shake up the mar­ket. So, too, does a 75-basis point hike with a promise of more to come. There’s an advan­tage to tak­ing the plunge all at one time. Done once, Pow­ell could’ve come out and clear­ly artic­u­lat­ed a path for­ward. He could have assured Wall Street, cit­i­zens and trad­ing part­ners across the globe that the 150-basis point hike is the mag­ic bul­let need­ed to bring down infla­tion and that any oth­er move­ment would be of inch­es rather than miles. Instead, Pow­ell not­ed at his Wednes­day press con­fer­ence that an addi­tion­al 100 or 125 basis points in increas­es would be required by the end of the year.

Fed­er­al Funds Effec­tive Rate from 2010 through August 2022. Source: Fed­er­al Reserve Bank of St. Louis

As with most changes, clear com­mu­ni­ca­tion is the most impor­tant ele­ment to get buy-in. Right now, traders feel betrayed. In the begin­ning, Fed fore­casts indi­cat­ed that a 75-point hike was his­toric and unlike­ly to be repli­cat­ed. Yet, infla­tion per­sists. In the long run, an hon­est approach would cre­ate more upheaval on the front end, allow­ing the heal­ing to begin much faster.

A Brook­ings Insti­tu­tion study, Under­stand­ing U.S. Infla­tion Dur­ing the COVID Erareached an unsur­pris­ing con­clu­sion: The Fed “like­ly will need to push unem­ploy­ment far high­er than its 4.1 per­cent pro­jec­tion if it is to suc­ceed in bring­ing infla­tion down to its 2 per­cent tar­get by the end of 2024.”

The Fed has kept inter­est rates at his­toric lows for over a decade. Investors, com­pa­nies and soci­ety have begun oper­at­ing as if near-zero rates would serve as the norm. Under­stand­ably, this rapid depar­ture from the norm has rat­tled mar­kets. And impli­ca­tions extend far beyond the mar­kets. The impli­ca­tions such increas­es have for the nation­al debt are even more excruciating.

How­ev­er, the increas­es are com­ing. There’s no ques­tion about that. To con­tin­ue the cha­rade that 75 basis points, and some num­ber of sim­i­lar addi­tion­al increas­es, is some­how more palat­able because the mar­kets don’t feel it all at one time is sheer pop­py­cock. The mar­kets, as well as investors, deserve to know the truth. Equal­ly impor­tant­ly, soci­ety deserves to begin the path to recov­ery. We could’ve start­ed this morn­ing. Instead, it will be in the months to come.

Relat­ed: What will dri­ve crypto’s like­ly 2024 bull run?

As it relates to cryp­tocur­ren­cy, the rate hike shouldn’t change the trend com­pared to tra­di­tion­al assets. Any hit to the mar­ket will affect dig­i­tal and tra­di­tion­al assets alike. For anoth­er bull mar­ket to emerge, reg­u­la­to­ry reform will be required. That won’t hap­pen until at least next year. The soon­er the Fed reach­es its mag­ic num­ber, the faster that eco­nom­ic heal­ing will start. In that way, the cryp­to com­mu­ni­ty should favor an expe­dit­ed time­line. Rip the band-aid off and allow heal­ing to begin while reg­u­la­to­ry guide­lines are nego­ti­at­ed. Then, cryp­to will be in a posi­tion where it may again blossom.

Richard Gard­ner is the CEO of Mod­u­lus, which builds tech­nol­o­gy for insti­tu­tions that include NASA, Nas­daq, Gold­man Sachs, Mer­rill Lynch, JP Mor­gan Chase, Bank of Amer­i­ca, Bar­clays, Siemens, Shell, Microsoft, Cor­nell Uni­ver­si­ty and the Uni­ver­si­ty of Chicago.

This arti­cle is for gen­er­al infor­ma­tion pur­pos­es and is not intend­ed to be and should not be tak­en as legal or invest­ment advice. The views, thoughts, and opin­ions expressed here are the author’s alone and do not nec­es­sar­i­ly reflect or rep­re­sent the views and opin­ions of Cointelegraph.

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