The headline in The Financial Times yesterday blared:
Powell says Fed prepared to move more aggressively to tighten policy
But the $64 question remains: How much more aggressively? It may not surprise many to know that prices rose 7.9% last month on an annual basis, and given Russia’s war on Ukraine and shutdowns in China, it will go higher. A lot higher. The Fed responded by raising its policy rate by just 25 basis points (0.25%) on Wednesday and signaling more increases over the course of the year. Maybe it will be 50 points next time. It should have been this time! It ought to be 50 basis points the next 12 times! Can we agree the Fed and Jay Powell- Fed chief- are playing it too cautious?
In the Weekend WSJ, we read (p. A2, 'War Prompted Vote, Says Fed Governor'), that - according to one Federal Reserve governor (Chris Waller) speaking on CNBC: "The data is basically screaming at us to go 50 basis points, but the geopolitical events were telling you to go forward with caution." Blah, blah.
And "caution" followed with that paltry 0.25% increase, but what was even worse were the limp projections for the next two years - up to 11 projected rates hikes but all around 25 basis points (except perhaps 2) which will keep the rates in negative territory relative to inflation. Do the math yourselves, e.g.
0.25% x 8 = 2.0% + 2 x 0.50% = 1%. Total = 3.0 %
But inflation likely at 7-8% or higher. Even the WSJ's own same day editorial had to point this out, e.g.:
"In December the median prediction of Fed governors and bank presidents was four 25-point increases by the end of this year. Now it’s seven, plus another four rate hikes in 2023...But the measure of the Fed’s problem is that even 11 projected interest- rate increases in the next two years would keep rates well below the level of inflation.."
Why so cautious? Well, Powell is likely fretting that any kind of "over reaction" in the rates - say eleven 50 basis point hikes - which is really the minimum needed, will lead to a recession and contraction of the economy. In other words, more or less like former Fed chief Paul Volcker induced with his interest rate hikes to cure 70s inflation. But I am convinced this is nonsense, given as the WSJ editorial points out (ibid.):
"The Fed also
climbed down from the fence on when to start shrinking the $9 trillion balance
sheet it has built up to ease financial conditions. The FOMC says it will begin
to reduce its holdings of Treasurys and mortgage-backed securities “at a coming
meeting.” This sounds like sooner rather than later. This “quantitative
tightening” is long overdue, and inflation might be much lower than it is had
the Fed started doing this a year ago.
The Fed’s problem is that it has already let inflation run free."
So true! The Fed, indeed, ought to have acted at least two years ago when interest rates actually headed into negative territory, i.e. see my Feb. 17 post. But no, the Fed did nothing, they opted to keep the stock party going - racing toward 36,000 DOW. I suspect that is one big reason they also want to be cautious now, they prefer not to get blamed for a bear market that might last a year or more - especially with the Ukraine war raising Caine in the markets.
Naturally everyone wonders exactly how high rates might go, with the prime worry being the Fed will overshoot neutral and cause a recession. Of course, the Fed has no intention of increasing rates into recessionary territory (at least not yet). The bad news is that it may be too late for neutral if we want to curb inflation. And at least one WSJ columnist (Walter Mead) suspects the dollar's value may also begin to slide because of the Fed's too conservative approach, combined with the effects of the sanctions on Russia.
To control an overheated economy we already know from history that the Fed has usually moved into contractionary mode, which is raising the policy rate above the natural rate. This means it’s more expensive for banks to get capital, and more difficult for average folks to get $$$ to spend on a kitchen remodel, or new car, used car, HDTV, new cell phone...or whatever. Thereby the economy shrinks and inflation falls. Right now, the Fed claims it wants to "go to neutral." But there is no magic interest rate where we risk a recession. There is also no good play here: you either get higher interest rates now, more unemployed (likely) as companies cut back, OR higher and higher prices and you have to cut back on what you can purchase. In no version of this universe are you going to have your cake and eat it, i.e. low prices and low interest rates!
A very high Fed policy rate, like 12%, would probably do it, but it’s unclear if 4% or 5% would. My bet is it would not, all that's going to happen is that inflation will keep getting worse especially as the gas prices spike higher as well as commodities. Mortgages are the first place people are feeling the effects of the Fed’s decision to start raising rates to curb inflation, but they won’t be the last. The next place will be groceries and if you think the prices of eggs and meat are high now, well, you haven't seen anything yet.
Those who doubt it can get worse need to read Jack Nicas' NY Times Sunday piece: Ukraine War Threatens to Cause a Global Food Crisis. Inn which he writes:
"A crucial portion of the world’s wheat, corn and barley is trapped in Russia and Ukraine because of the war, while an even larger portion of the world’s fertilizers is stuck in Russia and Belarus. The result is that global food and fertilizer prices are soaring. Since the invasion last month, wheat prices have increased by 21 percent, barley by 33 percent and some fertilizers by 40 percent. The upheaval is compounded by major challenges that were already increasing prices and squeezing supplies, including the pandemic, shipping constraints, high energy costs and recent droughts, floods and fires.
Ukrainian farms are about to miss critical planting and harvesting seasons. European fertilizer plants are significantly cutting production because of high energy prices. Farmers from Brazil to Texas are cutting back on fertilizer, threatening the size of the next harvests. Around the world, the result will be even higher grocery bills. In February, U.S. grocery prices were already up 8.6 percent over a year prior, the largest increase in 40 years, according to government data."
So buckle your belts because it ain't gonna be 'sweetbread', as the Bajans would say. While we're at it, I believe it's time (again!) to quash this bullshit rightist trope that the inflation is all on Biden. I will deal with higher oil prices in a separate post (Remember I once worked for an oil company in New Orleans in the late 60s, see e.g. Brane Space: There'll Be NO Oil! (brane-space.blogspot.com))
Had the austerity hawks who dominated the last recession (2009-10) been running the country this last time around, Americans would be in a world of hurt- much worse than dealing with 7 % inflation. Joblessness would be astronomical – near 8-9 % unemployment, the numbers of homeless would be triple what it is. But Americans' historical memories are typically around the capacity of kilobytes, not megabytes. They forget that a mostly monetary policy stimulus in 2009 left most of the population behind. Meanwhile, corporate profits were turbo-charged by the low cost of capital - bestowed on them by the rescue of the financial system - so those profits saw monumental gains. On the order of 70 percent from mid-2009 through 2019.
But the dynamic of the Covid pandemic was unlike that for the Great Recession and cried out for a different stimulus, not monetary. After all, the government has the greater responsibility to maintain the economy when business pulls back - or in the case of the pandemic, locks down, closes down, shutters outlets on account of supply side shortages, releases workers.
The only option in this case of a horrific pandemic-incited financial meltdown was to inject cash into the besieged population's hands, lots of it. And so we saw the $2.2 trillion CARES Act of March, 2020, which included cash payments of $1200 per person for each household, as well as an increase in unemployment benefits of $600/ week and more for small business. The largest stimulus package in U.S. history. This was followed by a $900 billion package in December, 2020, that provided $600 cash payments to most Americans, and a continuation of extra jobless benefits of $300/ week. Together the extra amounts spared millions from going under - not to mention with the moratoriums on rent collection.
Finally, we had the $1.9 trillion American Rescue Plan which continued the unemployment benefits bonus, as well as an other $1400 cash payment to most Americans, and best of all a child tax credit of $3,000 per child which saved hundreds of thousands of families including many here in Colorado. This expansion had the effect of reducing poverty in the U.S. overall and child poverty in particular. Census data in late 2021 found poverty had fallen to a 10-year low in Colorado. But Senate austerity hawks - including the Repubs as as well as Dems Manchin and Sinema, declined to renew this program . This has led to the same families now scratching to survive as best they can. Also hoping they don't end up homeless now as the rental moratorium has ended. The austerity hawks claimed they were preventing higher inflation. What they were really preventing was enough food getting into kids' mouths.
Let us try to bear in mind that without these cash -stimulus infusions debt would have exploded through the stratosphere coupled with massive economic suffering. As it is now, deficits have shrunk though you don't hear a peep from the Reeps saying much about that. They'd rather focus on dinging Biden for inflation when that has largely been due to supply chain problems bound up with the pandemic.
But what Jay Powell did get right was pushing - along with Treasury secretary Janet Yellen- for higher stimulus infusions. Both knew that the old monetary stimulus formula tried back in 2009-10 would not work in a pandemic. Why? Because a pandemic is more like fighting a long war than a credit crisis. What Powell has now gotten wrong, is that the higher inflation he so long desired is now out of control and requires a much more aggressive 'fix'. Alas, there is nothing in the FT article that indicates he is prepared to go as high as needed to really get the Ukraine-spawned inflation under control. And that means, in the absence of further cash stimulus payments, a lot more pain for ordinary Americans.
The fundamental potential error the Fed is making now? Raising rates in the future by a lot more than it's currently signaling. It is better to have the 'return to gravity' shock sooner than later, in my humble opinion. In the words of one wonk writing in the WSJ Exchange ('The End of Zero: What's Next?'):
"Many will find it crushing at first while others will be invigorated by a world where money actually costs something".
Count me in the latter group! The time for stock markets to feed off basically free money needs to come to an end. Ditto with borrowers living off savers!
See Also:
by Joan McCarter | March 20, 2022 - 6:21am | permalink
And:
by Steven Harper | March 19, 2022 - 6:35am | permalink
Excerpt:
On March 14, 2022, seven million Americans and their families became victims again. I'm one of them.
For the first time since the COVID pandemic began, Republicans jettisoned Congress's bipartisan approach of providing "no strings" emergency funds to battle the virus. Instead, the GOP insisted that Democrats find a way to pay for ongoing COVID testing, treatment, and vaccines. Otherwise, Republicans would scuttle the $1.5 trillion omnibus bill funding the entire federal government through September. The bill also included a $42 billion increase in military spending and almost $14 billion in emergency aid for Ukraine.
The COVID funds were a rounding error—a $15.6 billion item, or 1 percent of the omnibus bill.
And:
by Laura Flanders | March 18, 2022 - 5:39am | permalink
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