A key chart to watch as the Fed tightens monetary policy 📊

The Fed thinks it can cool inflation without triggering a recession 👀

(Source: Flickr / Federal Reserve)

On Wednesday, the Federal Reserve announced its first interest rate hike since 2018.

While the decision had been almost universally expected for quite a while, it nevertheless represented one of the more consequential moves in recent history to tighten monetary policy. And all else being equal, tighter monetary policy is expected to lead to higher financing costs for consumers and businesses, which represent headwinds to the U.S. economy.

Why would the Fed want to hinder economic activity? One word: Inflation. Currently, the inflation rate¹ in the U.S. sits at its highest level in 39 years. The prevailing thinking is that demand is outpacing supply, which is causing inflation to surge.² By tightening monetary policy, demand should ease, and in turn inflation should cool.

Inflation has actually been running hot for months, and its warning signs have been out there for a year. The Fed knew about this, but it had long communicated that it wanted to wait for the economy to make “substantial progress” from an employment perspective.³

That brings us to present day.

Labor market ‘misalignment’