Powell Wimps Out

Pretty much as expected, the Federal Reserve last week said that, in the face of rising inflation and a booming economy and job market, it would further reduce its purchases of Treasury and mortgage-backed securities and raise interest rates.

But not yet.

Beginning in January, the Fed said it will be buying $60 billion in bonds a month, which is down 50% from the original schedule of $120 billion a month and its recently reduced plan of $90 billion, announced only a month ago. Which means the program will end next March, as opposed to the original termination date of June, at which time the Fed expects to start raising interest rates unless something happens in the meantime.

The Fed is projecting three 25 basis-point increases in its federal funds rate next year, followed by three more in 2023 and two more in 2024. That would put the fed funds rate in a range of 1.4% to 1.9% at the end of 2023, up from a range of 0.4% to 1.1% in its previous projection in September. The current rate, of course, is 0.1%, or near zero.

To some in the financial media and on Wall Street, this qualified as a bold if not aggressive move to try to stifle inflation, which according to the November consumer price index, is running at a 6.8% annual rate, the hottest pace in 40 years. Yet the Fed seems content to let that fire burn on another three months or so before it will consider ending its asset purchases and raising interest rates, although the Fed did say that it “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

Let’s not lose sight of the fact that even as the Fed is tapering the size of its asset purchases, it’s still buying $60 billion a month, further ballooning the size of its balance sheet to close to $9 trillion. If that’s a hawkish move, I’ll have to revisit my economic textbooks.

“The risk of higher inflation becoming entrenched has increased,” Powell acknowledged at his news conference following the Fed meeting, consigning the “transitory” mantra to the dustbin of history. “That’s part of the reason behind our move today, to put ourselves in a position to be able to deal with that risk.” In other words, the Fed is prepared to do something about inflation, just not right now.

(That reminded me of the famous comment by St. Augustine, who history tells us led a life of debauchery as a young man before he found God: “O Lord, help me to be pure, but not yet.”)

Contrast the Fed’s decision with the one the very next day by the Bank of England, which didn’t say that it was merely prepared to do something about rising inflation in the U.K., now running at an annual clip of 5.1%. It actually did something about it. Right now. Immediately. It raised its policy rate to 0.25% from 0.1%. And it did so without any forewarning and in the face of surging cases of Covid-19 and the Omicron variant, which could forestall the country’s economic recovery.

Apparently, the American public and financial markets are just too fragile to be able to handle a decisive move by the Fed to end its asset purchase program and raise interest rates right now, moves that just about everyone outside the Fed believes are necessary.

Instead, it seems, the Fed is content to run the risk of inflation running out of control several more months before it takes firmer action, not just talk about it.

The analogy we keep hearing is that the Fed is “tapping” on the monetary brakes now, so it doesn’t have to slam on the brakes later on, as Paul Volcker had to do back in the early 1980s when inflation was running at double-digits. But make no mistake, the Fed isn’t braking at all; all it did was ease off the accelerator a little. However, it may find itself having to slam on the brakes next year if it continues to keep the monetary pumps working while our benevolent Congress and Administration add even more fiscal stimulus that the economy no longer needs.

Powell will no doubt go down in U.S. financial history as the investor’s best friend. Time and time again, he has exercised what has come to be known as the “Powell put,” bailing out jittery financial markets with monetary easing. And I’m not complaining since I’ve benefited from it. But he certainly won’t get many votes for acting decisively when the medicine might hurt.

Anyone can win praise for opening the floodgates with money. But at some point, you have to do the right thing, even if it hurts a little before your legacy goes down the drain and the economy with it.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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