Thursday, September 28, 2023

The Fed fears that the US economy will not cool down as planned

The market is like a roller coaster ride, going up and down depending on the mood of the passengers. There are two types of people: optimists and pessimists. The optimists are the ones who believe that everything will be fine and the market will keep going up. Pessimists are those who believe that everything will go wrong and the market will keep falling.

What makes some optimists and others pessimists? So it depends on many factors, some rational and some irrational. Sometimes we see the future objectively, and sometimes we see it biasedly. For example, if we really like a company, we tend to overestimate its benefits and ignore its risks. Or, if we’re afraid of losing money, we tend to sell our stocks when the market falls, even if that presents an opportunity to buy cheaper. These biases can cause us to make bad decisions and miss opportunities. For this reason, It is important to have a balanced view of the market, neither too optimistic nor too pessimistic, but realistic.

The Fed (the central bank of the United States) and the market are like a couple who love each other but don’t get along. The Fed is the one with the power to raise or lower interest rates, print or withdraw money, and boost or cool the economy. The market is the one that reacts to what the Fed does or says by buying or selling stocks, bonds, currencies, cryptocurrencies, and other assets.

The market recognizes the influence of the Fed but often ignores it. Because? Well, of course, the Fed sometimes makes mistakes. The Fed has made many mistakes in the past, telling us one thing and then doing another, giving us hope and then taking it away from us. But that alone doesn’t explain why the market sometimes defies the Fed. In many cases, it is because the market denies it. He only accepts what he wants to hear and ignores what doesn’t suit him. The market is like a moody child covering its ears when being scolded by the Fed.

The market is like a teenager waiting for his parents to give him permission to party. In the first half of the year, the market expected the Fed to pause and feast on equities and cryptocurrencies. Market expectations were high, but the Fed failed to meet them. The Fed told him there was still a long way to go, the economy wasn’t as good as it seemed, and he needed to be careful and responsible. The market resented the Fed but ignored it. He remained optimistic and assumed the Fed would change its mind.

At the Jackson Hole symposium, the market expected a dovish message from the Fed along the lines of, “Okay, you can wait a while, but don’t go too far.” But Powell surprised with a tougher message than expected. He told us that inflation was very high and that interest rates would probably need to be raised a few times. The market was disappointed after the speech. Feeling betrayed by the Fed, he became sad and sold his fortune. But in the afternoon, the market recovered. He told himself that the morning market had been cocky in its pessimism, the Fed wasn’t so bad, and maybe there was hope. And he bought his fortune back, thinking next time they would give him permission to party.

The problem is that the Fed and the public don’t speak the same language. The Fed talks about inflation, interest rates, and monetary policy. The public talks about consumption, employment, and income. The Fed sees the future; the public sees the present. The Fed knows that what looks good today may be bad tomorrow. The public doesn’t know or doesn’t care. The Fed wants to avoid a crisis, and the public wants to enjoy the moment. The Fed wants to slow the economy and cut jobs, not out of malice but out of caution. The public thinks the Fed is a villain from a James Bond film who only wants to destroy the economy. The Fed tries to explain why, but the public doesn’t understand or listen. The Fed and the public are in a numb dialogue. And so it goes.

The economy is like a pizza distributed to everyone. We all want to eat more pizza, but pizza doesn’t grow on its own. You have to do it with ingredients, with work, and with time. If the demand for pizza is greater than the supply, the pizza will be more expensive. That’s what happens with inflation. Inflation is the price of pizza. When inflation is very high, it means that pizza has become very expensive. And that’s no good for anyone. Neither for those who eat pizza nor for those who make pizza Therefore, one has to find a balance between the demand and supply of pizza. You have to buckle up, but only if you’re drowning. You have to eat less pizza, but not go hungry. It’s not evil; it’s clever. And it is also solidarity. Because if we all eat less pizza, there will be more pizza for everyone.

Now the economy is like a car that needs the right temperature to run well. If the car gets too hot, it could break down. If the car gets too cold, it can stall.

The labor market, consumption, and inflation are like car indicators that tell us how the temperature is developing. The problem is that the car is now too hot. There is great demand for work but little supply. There is a lot of consumption but little productivity. There is a lot of inflation but little stability. And that’s neither good for the car nor for the people in it.

That’s why the Fed wants to cool the car by raising interest rates and tightening monetary policy. But that also entails risks. If the car gets too cold, it can lose speed and power. So we are in a dilemma. Rising unemployment is bad, but letting inflation spiral out of control is worse. You need to find the right temperature point to keep the car working well.

World Nation News Desk
World Nation News Desk
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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