The Federal Reserve raised interest rates by three-quarters of a percentage point on Nov. 2 — the fourth consecutive such hike — in an effort to tame record high inflation hampering the U.S. economy. While the move was expected, not everyone agrees with it, with some experts arguing that the Fed needs to reconsider continued rate hikes.

                By                    Yaёl Bizouati-Kennedy

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John Catsimatidis, chairman and CEO of Red Apple Group — which owns and operates United Oil Refinery and 400 gas stations — as well as chairman and CEO of Gristedes & D’Agostino’s Supermarkets, said that he was “highly disappointed in the Fed’s decision to raise interest rates another 75 basis points.”

“Our current economic circumstances are different than normal and there are other solutions to curbing inflation, such as opening up the spigots of North American oil,” he said. “Inflation will reduce if we allow North American oil and gas to thrive, but instead, the President and our leaders in Washington are forcing the Fed to do the alternative and raise interest rates which will destroy other businesses across the American economy.”

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Other experts argue that the Fed’s hikes will hinder business operations and harm consumers too much. In turn, some — such as Salvatore J. Stile, founder and chairman of shipping and logistics, import/export company Alba Wheels Up International — believe that another option would be to eliminate tariffs on Chinese goods.

“The Fed rate hikes are harming the economy by increasing debt payments for small and medium-sized businesses and consumer credit cards. While this action may reduce inflation, it will deplete a consumer’s discretionary income, and businesses will be paying far more in interest payments for loans,” Stile said. “This will stymie business investment and cause business owners to seek cost reductions in various areas, including human capital. Inflation could be tackled in different ways, including eliminating the Section 301 tariffs (Trump tariffs) on Chinese goods.”

The markets briefly reacted positively to the Fed’s phrasing in its announcement, saying — in what could suggest a slower pace of tightening going forward — that it would take into account “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” in determining the pace of future increases in the target range.

Powell Signals Interest Rate Hikes May Continue

However, the markets took a sharp turn when Chair Jerome Powell, asked about the specific phrasing during his press conference, said: “Let me say this. It is very premature to be thinking about pausing. So people, when they hear lags, they think about a pause. It’s very premature, in my view, to think about or be talking about pausing our rate hike. We have a ways to go. Our policy — we need ongoing rate hikes to get to that level of sufficiently restrictive and we don’t — of course, we don’t really know exactly where that is,” according to a transcript of his remarks.

“The market did not like [the Fed’s] messaging,” Sylvia Jablonski Kampaktsis, CEO and CIO at Defiance ETFs, said. “I was watching the Nasdaq around 2 p.m. — down 100 points or so, go up 50 within minutes, thinking that the Fed acknowledged an ease off the gas, which meant that growth could breathe and recover.”

“While I understand red hot inflation needs to be tamed, and what appears to be a resilient economy is taking it — at some stage it goes too far,” she said. “After four 75bp hikes, it may make sense to pause and determine whether or not this plan is working, or perhaps if there are other ways to reduce inflation including working through supply chain issues, restrictions on oil and gas production, Covid shutdowns in China and such. At some point it may be reasonable to pause.”

Finally, some experts argue that while rate hikes can help tame inflation, they need to be done in conjunction with other measures, as they won’t solve the problem by themselves.

“Government should also take steps to boost the supply of goods — such as energy and food — for which demand exceeds supply despite those rate increases,” Peter Cohan, Babson College associate professor of management practice, said. “Rate hikes control inflation by making borrowing costs so high that consumers buy fewer goods and services. That drop in demand drives companies to reduce costs by firing workers. The unemployed workers have less money and therefore demand drops further — prompting more layoffs and ultimately corporate price cuts to boost demand.”

Cohan added that higher interest rates only have this effect on the purchase of goods that typically require significant borrowing — such as houses and cars — but they do not dampen the rising price of other goods and services, such as gasoline, home heating, food, restaurant and travel services.

“To curb inflation on these items, the government should boost supply so much that prices must drop,” Cohan said. “Specifically, the government could encourage energy companies to spend more on production rather than on dividends and stock buybacks. Government should also tax the windfall profits of food companies that are raising prices with impunity.”

In addition, he argues that while workers’ wages are increasing at ever higher rates, they still fall short of inflation — meaning that workers are still falling behind.

“If workers expect higher inflation and successfully get higher wage increases — dubbed a wage price spiral — the Fed will keep raising interest rates way above the 5% to 6% rate that investors expect. That means that to bring inflation under 2%, the Fed is likely to keep increasing rates — possibly above 10% — until the unemployment rate soars,” he added.

Powell Admits Inflation Becoming Increasingly Challenging

Powell concluded his press conference, saying “And I just think that the inflation picture has become more and more challenging over the course of this year, without question. That means that we have to have policy being more restrictive, and that narrows the path to a soft landing, I would say.”

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The Fed’s next meeting is December 13-14.

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