The Federal Reserve cavalry, led by Chairman Jerome Powell, is making it known without reservation that they intend to flame out inflation. Their intention is bold and decisive, finally led with action and not with words. This is a good thing, and over the long run our economy and nation will be better off because of it.
Let's face it. The Fed created this inflation problem by adding tons of liquidity into the financial system. It was akin to pouring tons of vodka into the punch bowl at the party. It was full-boat fun as long as the drinks were flowing, but the Fed finally felt it was time to turn out the lights on the party. It raised rates again last week, bringing the fed funds rate up to 3% and saying there will be more hikes to come.
Yet there are many out there who are displeased with the Fed's approach of strong rate hikes. When inflation needs arresting and the only tool to fight it is higher interest rates, why is the crowd upset about it? Higher rates will make earnings more challenging for companies, and higher rates in fixed income will become a more formidable opponent against other risk assets.
If the stock market presents the easiest way to create wealth when the environment is fertile, upset that system for a bit and you're bound to have civil unrest. But Chairman Powell and the committee know the only tool they have to cut down high inflation is a bold move with higher interest rates.
With that tool, the committee can restore price stability over time and preserve the strength of the US dollar. Without price stability our currency will soon become worthless, with too much money chasing too few goods. The cycle is vicious and very slow to reverse, but in the meantime buying power becomes less and less.
Why should investors and average Americans be happy? Because the committee finally is taking action rather than just uttering words. Perhaps Fed members felt the pressure from hearing the stories of everyday Americans and their plight against higher inflation and were compelled for bold action.
I don't believe they are done raising rates or even close. Fighting 8% inflation with 4% interest rates is like bringing a knife to a gunfight. It's just not going to work. I think the Fed is on the right path here to prosperity for the country; it just will be some years down the road. Couple the rate hikes with a sharp reduction in the Fed's balance sheet and we finally may come back to normal, if only the upset trader/investor can step away from the spiked punch bowl.