How transitory is transitory? Maybe inflation won’t turn out to be as “transitory” as we would like, but even the Federal Reserve thinks inflation will ease sometime in the not-too-distant future, likely this year. The bond market certainly doesn’t seem overly concerned about it, with the 10-year Treasury note trading late last week at about 1.75%, or about six percentage points below the current inflation rate. If inflation is such a big problem that must be addressed immediately, shouldn’t long-term bond rates be closer to 5% or 6% rather than less than 2%?
Then why is the Fed all of a sudden so worried about stamping out inflation when it’s also predicting that the inflation rate will come down fairly soon? What’s the rush?
According to its most recent economic projections released after its December 15 monetary policy meeting, the Fed said it expected inflation to fall to 2.6% this year, from 5.3% last year, then fall to 2.3% next year and 2.1% in 2024. Yet now the Fed can’t seem to stamp out inflation fast enough, even though it was Fed policy not too long ago to let inflation “burn hotter for longer.” What happened with that?
Is the Fed really worried about inflation burning out of control, or is there something more sinister afoot?
In his prepared remarks at his renomination hearing last week, Fed Chair Jerome Powell said, “We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.” By that, he meant ending the Fed’s asset purchase program earlier than planned, raising interest rates, and possibly reducing the Fed’s $9 trillion balance sheet. Fed governor Lael Brainard, President Biden’s choice to become vice-chair, said at her confirmation hearing the very next day that reducing inflation was the Fed’s “most important task.”
Looking at the most recent figures released last week, one could certainly argue that inflation needs to be addressed and quickly.
The headline consumer price index was up 7% year-on-year in December, the fastest pace since 1992, while the core rate, excluding food and energy prices, was up 5.5%, up from 4.9% in November and the highest rate since 1991. Producer prices, often a harbinger for consumer prices, were up 9.7% on a YOY basis, 8.3% excluding food and energy. Alarming, to be sure.
But is it really that bad? Yes, it’s high right now, but will that be true a few months from now? Many people don’t think so. The Fed itself doesn’t. Then why does the Fed have its fingers on the panic button, when for the past many years, Powell has had the patience of Job?
Could it be that the Democrats are extremely worried about inflation becoming an election issue that they are putting pressure on Powell and the Fed to snuff it out? Could it be that electoral politics is driving the agenda here and not economics?
Back in the day, Republican politicians who started to turn a little to the left and against their own party were routinely characterized in the press as having “grown.” Could it be that Powell has now “grown” in order to curry favor with his new champion in the White House? Is this payback for Biden renominating Powell for another term?
This wouldn’t be the first time where Powell has suddenly seen the light. A month or two ago, Powell basically relinquished any involvement in bank regulation, one of the Fed’s main jobs, right behind monetary policy. Rather, he has ceded oversight of the country’s largest banks to anyone favored by Elizabeth Warren, such as Sarah Bloom Raskin, whom Biden last week nominated to be Fed vice chair of supervision.
Also, at last week’s Senate hearing, Powell let it be known that he is now on board with progressive Democrats’ demand that the Fed use its power to allocate capital away from fossil fuel providers and toward green energy. “I think it’s very likely that climate stress scenarios, as we like to call them, will be a key tool going forward,” Powell said.
Previously, as you might remember, Powell had earned the ire of progressives for his failure to get with the climate change agenda. Warren publicly said she would vote against Powell’s renomination, as much for his industry-friendly stance on bank regulation as with his failure to embrace climate change.
Now it appears that Powell has signed on to just about everything the progressives want: climate change, bank regulation, and now fighting inflation with gusto, so the Democrats don’t go down in flames in the November midterm elections. And make no mistake, Biden and his friends are worried, very worried, about how inflation will affect the voters. They see the Fed as their only salvation, even though it’s their own policies that have ignited inflation.
And you thought the Fed was above politics.
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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.
One thought on “Rescue Me”
We haven’t yet arrived at Orwell’s “Ministry of Plenty”, but the Fed’s newly-invented role as arbiter of social justice (as defined by Treasury) moves us closer every day. Doubleplusgood comrades, doubleplusgood!
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