After two consecutive quarters of economic contraction — the textbook definition of a “recession” even if the National Bureau of Economic Research was loath to declare it — the economy grew by a 2.6% annualized rate in the third quarter of this year, beating expert expectations of 2.4%. Between nominal GDP expansion and the unemployment rate remaining at a near-record low of 3.5%, nobody has greater cause to celebrate today than Federal Reserve Chairman Jerome Powell.
Even though 30-year mortgages ticked upward to 7% this week, President Joe Biden has promised to respect the independence of the Federal Reserve. But the rest of the Democratic Party has allied itself with Wall Street in its attempt to bully the nation’s central bank into halting its crucial and courageous quantitative tightening campaign. The Fed’s failed quantitative easing and zero-interest rate policies of the past decade proved crucial to the Left’s preferred policies. Now that inflation has once again proven to be a monetary phenomenon, which it always has been, Democrats have little option other than to browbeat the Fed with appeals to pathos about their rate hike campaign threatening jobs and economic growth.
There are just two problems. First, the Fed has explicitly said that it doesn’t care. Second, nearly a year into its quantitative tightening the economy is still expanding and creating jobs.
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With real interest rates still negative (the federal funds rate is slated to hit 4% by the year’s end, whereas inflation remains near a four-decade high at 8.2%), the Fed still has a ways to go, but Powell has pledged to see inflation through, explicating that the Fed will prioritize bringing inflation back to its preferred 2% benchmark at the cost of a recession and even the lesser half of its dual mandate, “full employment.” The Fed has continued to defy investor expectations of a “pivot,” and the latest Fed minutes included the fact that “many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”
And contrary to the repeated warnings of Elizabeth Warren and company, nominal employment and economic expansion have held. In large part, this GDP print is so strong because of our exports, which have been beefed up by the U.S. dollar’s strength, that in turn has been beefed up by the Fed’s rate hikes instilling confidence in global markets.
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None of this is to say that a recession is not imminent. A decade of ZIRP, QE, and debt accumulation (up to $31 trillion) has left our debt-to-GDP ratio at its highest since World War II. An earth-shattering correction is probably necessary. The Dow Jones Industrial Index’s 6% decline since the start of Biden’s presidency and the Nasdaq composite’s decline of nearly 20% are just the start of that correction. As both the government and the citizenry start borrowing at the highest rates in 20 years, the economic picture will only worsen.
But for now, the Fed scored another crucial cover. That’s something at least Powell can celebrate.
