MTU professor says war could determine Federal Reserve policy

Michigan Tech College of Business professor Emanuel Oliveira says recent economic data is supportive of a change in monetary policy by the Federal Reserve Open Market Committee.

That assessment comes with the caveat of the recent conflict between Ukraine and an invading Russian army. If it is a protracted war that drags in other European nations, or even the United States, it will have a negative impact on business prospects for many industries. If it is a matter that is solved in short course then the future direction of policy will not need to be changed drastically.

The Federal Reserve spurred the economy during the COVID pandemic in two ways. The first is to target interest rates between zero and one-quarter percent, encouraging lending by banks. The other was to inject liquidity by allowing financial institutions to sell mortgage backed securities to the Fed in exchange for reserves that could then be lent to consumers. Combined with fiscal stimulus by the United States Congress, the easy money policy has led to high inflation, the worst in 40 years.

Oliveira says stocks are beginning to discount monetary tightening and speculative equities are already correcting significantly. However, automobiles and real estate, which require loans for most transactions, are beginning to enter bubble territory. Oliveira says if housing continues to appreciate as it has in recent years, we could see a replay of the late-2000’s where prices declined across the country. He emphasizes that current trends are unsustainable.