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The Federal Reserve’s Dilemma

After increasing interest rates once again yesterday, the Federal Reserve now finds itself in a difficult position.

Certain economists argue that the Fed has already raised its benchmark rate enough to combat the significant inflation seen over the past couple of years. They believe that any further rate hikes could potentially lead to a recession. These economists, commonly referred to as “doves,” think that the current benchmark rate, which is the highest it has been in 22 years, carries enough risk on its own.

However, there are also experts, known as “hawks,” who believe that the current inflation rate of 3 percent is still higher than what the Fed prefers. They argue that at least one more rate hike is necessary in order to prevent consumers and businesses from becoming too accustomed to high inflation. They fear that failure to do so could contribute to a continual rise in inflation, as people demand larger raises to keep up with prices.

For now, Fed Chair Jerome Powell and his colleagues are not taking a side. They plan to monitor economic data and make a decision during their next meeting on September 20th. Powell stated, “We’ve come a long way. We can afford to be a little patient.”

The charts below, created by Ashley Wu, demonstrate the recent trends. Inflation has decreased but remains somewhat elevated, while economic growth has slowed but is still above zero.

This newsletter aims to provide insight into the dove vs. hawk debate, giving readers a better understanding of the current state of the U.S. economy.

The doves emphasize the recent sharp decline in inflation and the factors that suggest this decline will continue. Supply chain issues have eased, and the strong labor market, which previously contributed to rising prices, appears to be cooling down. Economist Paul Krugman expressed optimism in a recent article, stating that reduced inflation without a recession is becoming more likely.

Doves are concerned that a rate hike in September could jeopardize this positive scenario. Corporate defaults are already on the rise.

“It’s clear that low inflation and low unemployment can coexist,” said economist Rakeen Mabud. “It’s time for the Fed to stop raising rates.”

A recession would significantly harm vulnerable groups in America, including low-income and disabled individuals. The tight labor market has encouraged their employment and wage growth.

Hawks see the risks differently. They argue that the official inflation rate of 3 percent is artificially low. Core inflation, which excludes volatile costs like food and fuel, remains closer to 5 percent.

“The Fed should not stop raising rates until there is clear evidence that core inflation is on a path to its 2 percent target,” writes Michael Strain of the American Enterprise Institute. He believes that the evidence does not exist currently and will likely not exist by the time the Fed meets in September. The fact that major consumer companies like Unilever continue to raise their prices adds to the hawks’ argument.

Fed officials themselves argue that it is essential to quickly control inflation to prevent Americans from getting used to rising prices. They believe that if people start demanding larger raises to keep up with prices, it could become another factor causing further price increases.

Ultimately, the hawks’ case revolves around the difficulty of reversing high inflation. They believe that when in doubt, the Fed should prioritize caution to avoid a prolonged period of damaging inflation like the one seen in the 1970s.

Where do Fed officials stand? At this point, they have the luxury of not having to choose a side, at least for now. There are two more months of data on prices, employment, and other factors before the September meeting. Powell stated that a rate increase in September is “certainly possible,” but also mentioned the possibility of holding steady.

According to Fed reporter Jeanna Smialek, they have every incentive to keep their options open.

  • The Fed’s economists no longer project a recession for this year.

  • Powell noted that the labor force has been growing, which is positive news for the Fed as it helps ease the labor shortage without increasing unemployment.

  • In response to a question, Powell mentioned the high consumer demand for the “Barbie” movie, but also noted that persistently high spending could be a reason for future rate increases.

  • Stock indexes initially rose after the Fed announced the rate increase, but fell after Powell gave his economic outlook.

Eternally cool: Fans keep you dry on a hot day. They let you channel Beyoncé. They say, “I love you.” Can an air-conditioner do that?

The yips: A star pitcher lost her ability to throw to first base. Now, she helps young athletes with the same problem.

Spillover: Could the next pandemic start at the county fair?

Lives Lived: Bo Goldman was one of Hollywood’s most admired screenwriters, winning Oscars for “One Flew Over the Cuckoo’s Nest” and “Melvin and Howard.” He died at 90.

The U.S. managed to secure a 1-1 tie against the Netherlands in a well-contested match, thanks to a second-half goal from co-captain Lindsey Horan.

Spain’s star midfielder Alexia Putellas returned to the starting lineup for the first time in over a year after recovering from a knee injury.

Off the market: The Angels are reportedly withdrawing superstar Shohei Ohtani from trade talks.

Honeymoon phase: Aaron Rodgers agreed to a reworked contract with the Jets, saving the team money and likely ensuring his presence on the team for multiple seasons.

A growing dialect: What is Miami English? Linguist Phillip Carter describes it as “probably the most important bilingual situation in the Americas today.” However, it is not Spanglish, where a sentence alternates between English and Spanish. Instead, even non-bilingual Miamians have incorporated literal translations of Spanish phrases in their English speech. For example, “get down from the car” instead of “get out of the car,” and “make the line” instead of “join the line.”

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