Federal Reserve blames inflation on current economic circumstances


When inflation threatens to affect the US dollar, the Federal Reserve's job is to act quickly to prevent it from destabilizing the country's financial system. Raising interest rates is the most effective way to deal with the issue. Since inflation in the U.S. is currently at 40-year highs, the Fed is expected to continue raising interest rates in an effort to prevent financial bubbles.

Last week, the Fed raised its interest rate for the fourth time in three years. Its chairman, Jerome Powell, delivered a more somber tone than in previous meetings. He admitted that some factors that affect the central bank's decisions are out of his control.

According to Powell, the Fed's goal is to keep the consumer price index at 2%. However, it's not clear if this goal can be achieved due to the various factors that can affect it. For instance, the war in Ukraine and the rise of commodity prices are still expected to impact inflation significantly.

Despite the multiple factors that affect the Fed's decisions, Powell said that no change in monetary policy would help prevent inflation. He noted that the path toward achieving the 2% target is becoming more difficult due to the external forces.

The Fed struggles to contain inflation

In response to the rising inflation rate and the record low consumer sentiment, the Biden Administration highlighted the Fed's role in controlling prices.

Multibank
97/100
Multibank Review
Visit Site
Capital.com
96/100
Capital.com Review
Visit Site
Markets.com
96/100
Markets.com Review
Visit Site

Brian Deese, the head of the National Economic Council, said that the Fed has the necessary tools to effectively address the various factors that affect the country's economy.

Despite the Fed's efforts to contain inflation, Powell said last week that the rising food and gas prices are not in his control. He noted that the central bank's monetary policy could not prevent inflation from returning to its 2% target.

"So much of it is really not down to monetary policy," Powell said Wednesday. "The fallout from the war in Ukraine has brought a spike in prices of energy, food, fertilizer, industrial chemicals and also just the supply chains more broadly, which have been larger — or longer lasting than anticipated."

Mark Zandi, the chief economist of Moody's Analytics, said that the rising prices of gasoline and food are the main factors that have caused inflation. Zandi said that the invasion of Ukraine by Russia had caused global oil prices to spike. However, he noted that inflation should eventually moderate once the market adjusts to the new sanctions against Russia.

"The primary culprit [of inflation] was higher energy prices, particularly gasoline, and a lot of that can be traced back to Russia's invasion of Ukraine that caused global oil prices to spike," Zandi said.

It's unclear if the recent interest rate increase will be enough to limit the spread of inflation. Although Powell acknowledged the challenges the country has faced, he said that the factors that caused inflation could still affect the central bank's ability to control it.

"I think events of the last few months have raised the degree of difficulty, created great challenges," Powell said. "And there's a much bigger chance now that it will depend on factors that we don't control."