It is Mid-2022 and the Fed Has Still Done Nothing to Fight Inflation

In November, the Fed started the hawkish talk

It was last August when Jerome Powell began to admit that inflation just might be a issue.

But even then, he was only willing to declare inflation would likely be “ moderately” above the arbitrary 2 percent inflation standard. Back in August,   low   inflation— not high inflation— had been still perceived to be the “ problem. ” But details had certainly changed by late November when Powell  was forced simply by reality to retire  “ transitory”   as the preferred adjective to describe price inflation. At that point, the Fed began strongly hinting that it would finally do something to rein in price inflation. Yet exactly when that might occur remained anyone’s guess.  

Fed Discussions Big, Does Little

Throughout the end of 2021 and into early 2022, the Fed resolved into a comfortable pattern  of repeatedly stating that it would— at  some   point— end quantitative easing, and possibly embrace tightening. But such policies have already been extremely slow to actually appear. It was not until past due January, for instance that resource purchases at the Fed began to slow. They didn’t  stop , of course. They merely slowed. But resources purchases— which function to create new money, prop up asset prices, and generally fill the money supply— continued in an upward trend well directly into April. As late as April 13, the Fed’s total assets rose to a  new perfect high   of $8. 965 trillion. There is absolutely no sign of any significant decreases to the portfolio, meaning the Fed has taken no steps to actually “ normalize” or reverse quantitative easing.

Moreover, raises to the target federal funds rate amounted to exactly 1 increase— to the tune associated with 0. 25 percent. That is, right after many months of discuss rising the target rate, jooxie is now approaching mid 2022 with a target rate in a pay 0. 50 percent. Recently, however , the Fed alone repeatedly hinted that it would pursue numerous rate raises in 2022. But the time clock is ticking. Even if the Fed increases the target rate 50 basis points at the May meeting, that would put the target rate at only one 00 percent.

Rates of 4 or 5 % Are Needed

A single percent may seem high for some market observers of latest rate cycles, but we are going to now in a high-inflation atmosphere with price inflation over eight percent. The Fed is going to have to do more than a mild hike here and there to make a drop in 8 percent CPI (Consumer Price Index) pumpiing. Even mainstream observers understand this, and Ken Rogoff  this week suggested   that the odds of success in bringing down inflation with rate hikes of two percent or 3  % “ is really unlikely. I think they’re going to have to raise rates of interest to 4% or 5% to bring inflation down to 2 . 5% or 3%: ”

For some traditional perspective: the Fed have not allowed the federal funds rate to rise above second . 5 percent since 2008. The last time the federal funds rate exceeded 5 percent? August 2007.


And no, there’s still no concrete talk of  actually unraveling the balance sheet.  

So as all of us look to the May Federal Open Market Committee meeting, the likely scenario is really a small rate hike in the face of 8 percent inflation, without significant changes to the stability sheet. That’s what wish likely to get after a few months of increasingly hawkish speak from the Fed: Virtually absolutely nothing.

A Souring Economy

Yet looking at the state of the economy, it is increasingly clear the reason why the Fed is not willing to make any sudden movements. The economy is increasingly weak, and those in favor of the narrative that the US is within the midst of an economic boom  have nothing in order to stand on but the unemployment rate.

Most everywhere else, the data is less than impressive. A week ago, new GDP (gross domestic product) data showed the particular economy actually shrank throughout the first three months of 2022. It’s not “ officially” a recession until two one fourth of economic contractions are recorded, but the fact is the economy is shrinking after two years of massive levels of easy money. It should be booming.

Meanwhile, genuine disposable income has fallen so much in 2022 it’s far now below the trend, and  is down 10. 9 percent for the 1st quarter , year more than year. And what about all those sky-high savings rates we kept hearing about during the covid panic? That has totally evaporated and in March,   the personal saving rate fell to 6. two percent , the lowest level reported since 2013.   Consumer confidence and home sales fell within April . Inflation  is outpacing wage development .

The fallback position in the midst of all this, however , is to say some thing about how the unemployment rate is low, and how you will find a labor shortage. And indeed, Jerome Powell has repeatedly visited that well, simply stating the “ economy is usually strong” as his standard stock answer for exactly why the Fed will simply stay the course.

But reciting employment statistics in the midst of forty-year inflation  highs and a shrinking economic climate has its limits. In fact , it betrays a sizable degree of denial since, as Danielle DiMartino Booth  observed on Tuesday , “ Unemployment is the most lagging of all economic indicators. ” If Powell relies on unemployment amounts to explain why the economic climate is “ strong, ” he will simply “ evicerat[e] his credibility. ”

The reality is that the economy is getting and personal finances are worsening. Inflation is high plus wages are not keeping up. Under these conditions, the Fed will desperately want  in order to embrace  more   easing so as to prevent a full-blown recession. An example  of the Fed tightening just as the economy is usually weakening? That’s practically a unicorn. The big exception, of course , is Paul Volcker that in the economically weak times of the early 1980s embraced real monetary tightening to reduce inflation. It’s hard to see how Powell could do the same, because Powell has continually proven that his Fed is very much a Fed committed to kicking the can in the future to serve short term politics interests. This is an election calendar year, after all.  

That means it’s time to buckle up for more inflation. Plus, ultimately, we may get a economic downturn anyway since it may be that all that is necessary to send the economy over the cliff is simply another rate hike or two of 0. twenty five or 0. 50 percent.

Leave a Reply

Your email address will not be published. Required fields are marked *