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Hauling inflation down to the U.S. Federal Reserve’s target rate of 2 percent will bring “some pain” to the nation’s economy and consumers and may depend on factors the Fed is unable to control, Fed chair Jerome Powell said last week.
“It probably would have been better for us to have raised rates a little sooner,” Powell admitted.
“I’m not sure how much difference it would have made but we had to make decisions on what we knew then and we did the best we could,” he said.
The comments were as frankly bearish as Powell has made and came as the Fed embarks on its most aggressive campaign of policy tightening in more than a decade.
The central bank has boosted its base rate by three-quarters of a point so far this year. Analysts expect it to add another point by the end of July and keep raising the rate at least until 2023.
Markets are pricing in a year-end Fed rate of 2.7 to 3 percent.
The Fed also has begun emptying its $9-trillion bond portfolio.
The Fed’s plan is to “expeditiously” raise interest rates to so-called neutral, a level at which inflation eases, the jobs market remains strong, and the economy does not stumble.
“Getting inflation down to 2 percent will include some pain but, ultimately, the most painful thing would be if inflation were to get entrenched in the economy at high levels,” he said.
“Whether we can execute a soft landing may actually depend on factors we don’t control,” he added, “but we should control the controllable . . . there’s a job to do on demand.”
Powell’s statements were released shortly after the U.S. Senate voted 80 to 19 to confirm him for a second term as Fed chair last week.
Doubling Down
Today Powell told The Wall Street Journal that he will back interest rate increases until prices sharply fell and that “If that involves moving past broadly understood levels of neutral we won’t hesitate to do that.”
Doubling down on the interest rate rise to slow inflation (after denying that inflation was rising for a year and a half), he said, “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.”
TRENDPOST: Powell’s comment that “we had to make decisions on what we knew then” is hard to understand.
If 2 percent was a target rate, why did the Fed do nothing until inflation was rampaging at almost four times the “target” rate?
Inflation was raging throughout 2021, as we noted in “Inflation Tsunami Approaching” (4 May 2021), “Inflation Soon To Get Much Worse” (18 May 2021), “Fed Officials Send Mixed Signals on Policy Shift” (29 Jun 2021), “When Will Fed End Cheap Money Policy?” (27 Jul 2021), and in many of our “Market Overview” sections.
It took Powell until late November to stop saying it was “temporary” or “transitory.”
Throughout those months, the Fed worried too much about shoring up the jobs market and paid too little attention not only to inflation, but to the combination of global factors that were squeezing it.
At his December 2020 press conference, Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens,” he noted.
Wrong, wrong, and wrong.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation this year would be 2.4 percent.
Instead, it topped 6 percent in October and has averaged 4.1 percent from January through October.
Until November, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
In Congressional testimony last 30 November, Powell admitted it is “probably a good time to retire” the Fed’s characterization of inflation as transitory.
However, Powell himself did not retire; president Joe Biden reappointed him to another term as Fed Head and the U.S. Senate confirmed him by an overwhelming vote.
TREND FORECAST: Given its past timidity, the Fed is unlikely to raise interest rates high enough fast enough to halt inflation. If it did, the U.S. economy would be thrown into a recession and the rest of the world’s economy would follow.
Inflation is more likely to be slowed by consumers simply refusing, or being unable to, pay constantly rising prices. Discretionary purchases will shrink, then shoppers will ditch pricey brand names for bargain alternatives, and finally they will do without.
The Fed’s real challenge is to pick an interest rate that allows consumers to keep shopping; consumer spending accounts for more than two-thirds of the U.S. economy.
Again, should equities and the economy suddenly crash under the weight of interest rate rises in the next several months, we forecast the Fed will stop raising rates. And, prior to the 2024 Presidential elections, the Fed will lower rates to boost economic growth. Remember: “It’s the economy, stupid.”