Fed Vice Chair Lael Brainard doubles down on the commitment to use interest rate hikes to combat inflation. Meanwhile, that inflation has eaten into economic growth over the summer according to a new report.

CNBC/Jeff Cox
Fed Vice Chair Brainard vows ‘we are in this for as long as it takes’ to stop inflation

Federal Reserve Vice Chair Lael Brainard vowed Wednesday to press the fight against inflation that she said is hurting lower-income Americans the most.

That will mean more interest rate increases and keeping rates higher for longer, she said in remarks prepared for a speech in New York. Brainard cushioned the comments with an acknowledgement that policymakers will be data dependent and conscious of overdoing tightening.

“We are in this for as long as it takes to get inflation down,” the central bank official said, just two weeks before the Fed’s next policy meeting. “So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.”

Stocks rallied after the remarks as investors look for signs the Fed is committing to bringing down inflation without going too far.

“At some point in the tightening cycle, the risks will become more two-sided,” Brainard added. “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with overtightening.”

Markets are betting that the rate-setting Federal Open Market Committee enacts its third consecutive 0.75 percentage point increase in benchmark rates when it meets again Sept. 20-21.

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Fox Business/Megan Henney
Fed Beige Book shows US growth outlook dimming as inflation bites

The U.S. economic growth outlook deteriorated over the summer even as record-high consumer prices showed signs of decelerating, according to a new Federal Reserve report. 

In its region-by-region roundup of anecdotal information known as the Beige Book, the Fed reported that price levels “remained highly elevated” in its 12 districts from mid-June through August that the report covers, although nine districts reported some degree of moderation in their rate of increase.

Most businesses anticipate that high prices will persist for the remainder of the year. 

“Substantial price increases were reported across all Districts, particularly for food, rent, utilities and hospitality services,” the report said. “While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates.”

The Federal Reserve has been raising interest rates at the fastest pace in decades as it seeks to crush the hottest inflation in four decades. Policymakers approved back-to-back 75 basis point interest rate hikes in June and July and have signaled that another increase of that magnitude is on the table during their September meeting. 

There is a growing consensus on Wall Street that the Fed will trigger a recession with its war on inflation. Hiking interest rates tends to create higher consumer and business loan rates, which slows the economy by forcing employers to cut back on spending. Mortgage rates have nearly doubled from one year ago, and some credit card issuers have ratcheted up their rates to 20%.

That sentiment has spread throughout the Fed’s regions; the Beige Book reported that the outlook for future economic growth remained “generally weak” over the summer, with businesses expecting a “further softening of demand over the next six to 12 months.”

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Kitco/Cornelius Christian
Brace for a possible U.S. debt crisis if inflation stays elevated, democracy itself is at risk – Michael Gayed

The U.S. could have a sovereign debt crisis as Treasury yields rise and other countries fail to pay back their dollar-denominated loans, said Michael Gayed, portfolio manager and Publisher of the Lead-Lag Report. These trends, in turn, could pose risks to U.S. democracy.

Gayed’s research shows that Treasury yields, on a weekly basis, have been rising 68.6 percent of the time in 2022, a level that is unprecedented. Rising yields could weaken a government’s ability to fulfill its debt obligations.

“My hope is that this anomaly ends, and that we’re not headed for a sovereign debt crisis,” said Gayed. “We want to be really careful about how despotism happens. Conditions create the monster. What I’m really referring to is how the Weimar Republic created conditions for Hitler’s rise to power.”

Although Gayed said that another Hitler-like despot is not necessarily going to arise, he stressed that conditions in the German Weimar Republic of the 1920s, with its high inflation and debt troubles, are analogous to the U.S.’s similar problems today.

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