March 18, 2022

Federal Reserve Acts

The Federal Reserve on Wednesday raised interest rates for the first time since 2018 and laid out an aggressive plan to push borrowing costs to restrictive levels next year in a pivot from battling the coronavirus pandemic to countering the economic risks posed by excessive inflation and the war in Ukraine… Even with the tougher rate increases now projected, the Fed expects inflation to remain at 4.3% this year, dropping to 2.7% in 2023 and to 2.3% in 2024.” Reuters

See past issues

From the Left

The left generally cautions against drastic action that might cause a recession.

Some argue that “A year ago, the Fed thought inflation would be in the 2 percent range for the next year. Six months ago, it was expressing optimism that inflation was transitory. Two weeks ago, it was still buying mortgage-backed securities even as house prices had increased by more than 20 percent… There is little basis for confidence in the Fed’s assessment of inflation risks…

“With extraordinarily tight labor markets getting tighter by the best available measures, and wage inflation running at 6 percent and accelerating, high inflation was a major risk even before the events of recent weeks. We now face major new inflation pressures from higher energy prices, sharp run-ups in grain prices due to the Ukraine war, and potentially many more supply-chain interruptions as covid-19 forces lockdowns in China… To avoid stagflation and the associated loss of public confidence in our country now, the Fed has to do more than merely to adjust its policy dials — it will have to head in a dramatically different direction.”

Lawrence H. Summers, Washington Post

Others counter that “The stagflation that people remember from the 1970s occurred due to a unique set of circumstances. I think of it as a very crowded elevator. Entering the elevator all at once are an economic recession, an oil embargo, and a floating dollar suddenly linked no longer to the price of gold. They’re all jostling each other quite rudely to push the button for their floors, none of them giving a damn what the others think, all of them outraged by the lack of deference. That was stagflation…

“It’s possible to imagine the elevator crowding in such a way again, but it seems unlikely. U.S. sanctions on Russian oil and other items will be inflationary, but nothing like the Arab oil embargo or the 1979 oil shock. The United States can’t go off the gold standard again because it never got back on. Recessions—yes, recessions do happen. But at the moment we’re in a pretty robust economic expansionwe are not headed back to the 1970s.”

Timothy Noah, New Republic

“Way back in 1997 Ben Bernanke, Mark Gertler and Mark Watson published a classic analysis of the effects of oil price surges on the U.S. economy. They concluded that the recessions that often followed oil shocks mainly reflected ‘the endogenous monetary policy response.’ In English (more or less), recessions happened not because oil prices went up, but because the Fed, fearing a wage-price spiral, responded to rising oil prices by sharply raising interest rates…

“[The Fed] should be gradually raising interest rates to cool off an economy that looks somewhat overheated. What the Fed should not do, however, is allow itself to be bullied into slamming on the brakes… Current inflation is high, as are expectations of inflation over the next year, but medium-term expectations of inflation haven’t gone up much and are nowhere near their levels circa 1980. This suggests that inflation isn’t getting entrenched in the economy. If the economy cools off a bit and the inflationary shock from oil prices is, as I expect it to be, a one-off affair, we’ll do OK if the Fed just keeps calm and carries on.”

Paul Krugman, New York Times

From the Right

The right calls for even more aggressive action to combat inflation.

The right calls for even more aggressive action to combat inflation.

The probability that inflation will fall as the Fed projects is close to zero. Goods inflation has reflected excess demand fueled by aggressive fiscal and monetary stimulus and supply shortages. The pipeline of stimulus remains ample. Soaring home prices are pushing up costs of shelter, a key component of inflation. Inflation in services, which constitute more than 60% of the consumer-price index, will accelerate. Russia’s invasion is driving up oil and commodity prices and accentuating supply-chain bottlenecks…

“The federal government has yet to spend a sizable portion of the more than $5 trillion in deficit spending that has been authorized, and that doesn’t count the $1 trillion for infrastructure passed in November. In addition, more defense spending is now likely. Many individuals and small businesses saved large amounts of the checks they received. The stock of personal savings is estimated to exceed $2 trillion more than pre-pandemic levels…

“As the pandemic ebbs, jobs and disposable incomes will continue to grow, and households will spend their excess savings…  The lagged effects of the fiscal stimulus will be forthcoming.”

Mickey D. Levy, Wall Street Journal

“The national debt has risen $3 trillion since COVID hit, first to fund bipartisan relief and stimulus efforts as the pandemic slammed the economy — but then to fund $2 trillion in purely partisan (and highly inflationary) Democratic wish-list programs just weeks after Biden took office… Now America’s headed back to the 1970s, with labor demanding major pay hikes to cover the bite inflation takes from paychecks, raising employers’ costs so they have to charge more; rinse and repeat…

Breaking that cycle requires a serious shock — not a few carefully-spaced quarter-point increases. If the markets don’t scream over a rate hike, it’s not enough. And addressing the root cause of cancerous money-supply growth requires a loud and credible commitment to reducing the Fed’s own balance sheet, which was too large even pre-COVID because Powell never fully unwound the positions taken during the crisis before that, the 2008 mortgage meltdown.”

Editorial Board, New York Post

The Fed’s problem is that it has already let inflation run free, as the governors and bank presidents all but admit. They are now forecasting an inflation rate this year of 4.3%, a leap from 2.6% only three months ago… [The personal consumption expenditure price index] was 0.6% in January alone, so it will have to slow considerably in the rest of the year to meet the Fed’s 4.3% estimate for 2022. Good luck…

“Even with the 11 25-point rate hikes anticipated by the Fed, the fed-funds interest rate would be only 2.8% at the end of 2023. That would still be lower than the likely inflation rate, which means real rates would be negative for all of 2022 and 2023. The long experience of monetary policy is that inflation doesn’t fall until interest rates exceed the inflation rate. There’s no reason to expect this time would be an exception, barring a recession.”
Editorial Board, Wall Street Journal

Get troll-free political news.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.