Restoring Credibility

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by Chris Black

Why did the Federal Reserve hike interest rates at the fastest, most aggressive pace it ever had in 2022?

“The narrative goes like this: the epic COVID fiscal stimulus induced a corresponding spike in consumer prices. As inflation began to steadily creep higher, monetary officials dismissed it as ‘transitory supply effects’ and, throughout most of 2021, FOMC members maintained that interest rates could be kept at near-zero through 2023. At some point, the Fed realized that inflation was indeed not transitory, and so began the historic rate hiking cycle of 2022-23. They tell us that they had to ‘catch up’ on inflation, with seven consecutive rate hikes, in order to ‘restore their credibility.'”

But is this the full picture?

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I argue that it isn’t, and that the Fed was forced into an aggressive hiking cycle to take control over repo rates as the world transitioned onto SOFR.

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