The Fed has made a historic mistake on inflation

https://www.economist.com/leaders/2022/04/23/why-the-federal-reserve-has-made-a-historic-mistake-on-inflation

by RyanShook • 4 years ago

113 210 4 years ago

economist.com

laurasia99• 4 years ago

https://archive.ph/QIhCu

endymi0n• 4 years ago

Why the Fed has made a historic mistake on inflation: Because it didn‘t want to do the other historic mistake.

The Fed‘s basically got binary options here: Keep inflation from ruining lives and savings or saving the economy from collapse. Or trying to do just a bit of both.

I’m rather asking myself: When you‘ve got a water pipe with a valve you can just open and shut and the leakage getting larger and larger with less and less water arriving at the end, is it the one operating the valve doing the historic mistake?

jerf2• 4 years ago

The historic mistake is all the can-kicking that got us here. "The market can remain irrational longer than you can remain solvent", as the saying goes, but it sure does seem like the road the can has been kicked down is ending pretty darned soon.

adventured4• 4 years ago

They can kick the can for another 20-30 years at least before they're forced to change tactics.

In the Japan scenario that the US is following, the US is just now getting to where Japan was in the mid 1990s. And that's Japan without the global reserve currency and the numerous financing benefits that go with it.

The US has an enormous asset base to debase against, to eat, before it arrives at truly severe problems. It has plenty of spare taxing capacity across every income bracket.

And as the feds crush the income brackets with higher taxes over time, socialized healthcare will continue to creep up the income bracket, taking up more and more of the market (out of necessity due to cost; middle and low income brackets will lose more of their disposable income to taxation, healthcare will become that much more of a burden).

Interest rates will remain exceptionally low for decades to come. The average rate the US Govt pays on its debt will continue to sink lower over time, as the mountain of debt soars higher. That can continue until at least the range of $60-$90 trillion in public debt (1% - 1.5% on $60t-$90t is where they'll push it to over time). 1% on $60t is affordable right now. The skeptics will proclaim such low rates on such a giant pile of debt is impossible - it's not; they would have claimed (circa the mid 1990s) that what has already happened would be impossible too. Courtesy of Japan, we already know what can and will happen, and so does the Fed (even though they constantly lie about it).

The massive debt accumulation (in government and corporate) will take care of a lot of the inflationary pressure that would otherwise be present, courtesy of mediocre growth (the debt accumulation and maintenance robbing the economy of capital it needs to grow faster; the debt acting as a heat sink, which is exactly what it has done to Japan).

This inflation spike is transitory (the people saying that were too early on the duration aspect though and so they got mocked for it), the labor market is about to crack, growth is at recessionary levels, crypto has crashed, bubbly stocks have crashed. The housing market is going to get hit (although it won't be like the great recession) as the labor market gets rattled, people will shift that much more conservative, and blue chip stocks will get hit harder (blue chips like eg KO, which have largely avoided the damage in the market so far). With mediocre growth and a broken labor market, the inflation wave won't be sustainable over a longer time frame. It's better to think of the present inflation wave as a large one-off reset to higher prices (fallout from the various effects and choices during the pandemic), rather than a persistent ongoing event. That type of inflation burst event might happen from time to time over the coming decades as a consequence to various programs the US Govt and Fed run to try to spur the economy and manage high debt levels. For example, as the economy continues to weaken, the Biden Admin will start talking about trying to do another stimulus shot and or infrastructure.

Corporations have rapidly sapped their pricing power to counter inflation. Consumers can only take so much of that, and I believe we're clearly seeing weakening by the consumer in their willingness to keep absorbing huge price hikes on consumer goods. The corps will begin slashing the human cost soon (both delaying hiring and firing) and pushing automation more (eg if your local Walgreens or CVS doesn't have a self-checkout, it soon will; if your local McDonald's doesn't have digital kiosks, it soon will; they'll push labor cost onto the customer wherever they can).

---

edit:

Someone (greyed out account) replied with this, and I thought it was worth touching on:

there's no way you can convince me healthcare costs will go up if we kick the capitalists out of the industry

Well that's not what's going to happen and it certainly won't be a smooth event (the US wakes up one day with a shiny new socialized healthcare system where costs are tightly controlled with top-down pressure). Rather, socialized healthcare will gradually climb up the income ladder out of necessity, because more and more people will be unable to afford the cost of healthcare. The US healthcare market, simply put, will continue to bifurcate (public vs private). Private health coverage will continue to get more expensive, pushing more people onto government coverage / subsidy. The government side will see a lot more top-down pressure on cost/pricing (the government has a very strong incentive to control costs, given the fiscal condition of the US Government, and they'll act accordingly over time). Only the top 1/3 (give or take) income group will continue to be able to afford private healthcare coverage. Private coverage isn't going away and the healthcare market overall isn't going to be nationalized (ie the Capitalists are not getting kicked out wholly, their sandbox will get smaller and what they can charge will get more restricted).

The US will see a process of gradual, ongoing expansion of socialized healthcare. It will not happen in a big one-off event, as has been dreamed of for decades by the Democrats (they've been making a horrific mistake for decades by pursuing that approach, which was obviously going to fail; a lot more progress could have been made by now via an aggressive piecemeal persistence). The one-off system change premise is a particularly naive fantasy and can be safely disregarded as a potential outcome.

The median American will see a decline in their real disposable income. It'll squeeze them in a lot of different ways as that occurs, including on healthcare, education, housing, rent, automobiles, etc.

The income classes will fail to keep up - as they largely have over the past two decades - with the damage to the USD from the national debt and the actions the Fed has to take to deal with that (the Fed playing the role of both enabler and fixer, when it comes to public & corporate debt levels). The asset classes will be fine, they'll largely keep pace (or better) with the loss of value in the USD, although their taxes are going to go up by quite a bit over time (and there will be many attempts at pursuing wealth tax plans). As the income classes lose ground over time, the government will step in and take over more of the financial context of the healthcare and education markets in particular.

pmalynin• 4 years ago

If the same operator also jammed the valve open with a wrench, then ignored the flow meter as it rung up by saying “the leak is transitory”, then yea.

willcipriano• 4 years ago

They also weren't really concerned about the leak as it destroyed the households below it, that is until the people on the floors under them started collecting the water for their own use (increased wages) and the pressure in the penthouse bathrooms started being the subject of complaints, then they had sudden urgency to resolve the situation.

dariusj18• 4 years ago

Let's beat the metaphor to death. They opened the valve because there was a fire below that needed to be put out. Better to deal with flood damage than lose the whole enchilada.

puranjay2• 4 years ago

Isn’t this a self-created problem? They had no real excuse to carry on QE past 2010 when the economy had started recovering.

voisin3• 4 years ago

It 100% is. And what’s more crazy is that Alan Greenspan admitted that his biggest career failure was to leave rates too low for too long just prior to the Great Recession. And then… his successors did exactly the same thing.

It is almost like the system should have automated rules in place to prevent this from being possible.

mc323• 4 years ago

to an outsider (me) it looks like the Fed thought that if enough people believed the lie ("it's transitory") that things could go on despite fundamentals being out of whack (and we had quite a few people (economists, financially literate people, etc.,) go along for the ride of the ruse... but as always, the chickens eventually come home to roost in their own nest. and so it has and now we're here.

Was it totally preventable? Not likely. Did it have to be so precipitous and ruinous? Nope. They could have come correct and could have adjusted rates and have encouraged people back to work but dialing back the stimulus sooner --slowing the money printer.

thoughtstheseus5• 4 years ago

As a Fed watcher I can dispel a few of these notions. The Fed was never going to tell people inflation was taking hold. The Fed tells people what they would like the market to be… not what it is. They set the “framing” used by many market participants, this framing is one of its key tools.

The Fed can’t control government spending. Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that. If anything Powell consistently advocated for a more balanced federal budget precovid.

thephyber8• 4 years ago

Honest question: how can you prove the current inflation is not “transitory”?

I have heard pretty good arguments for the idea that supply and demand are still trying to find a new equilibrium in the post COVID demand shock.

What is the specific criteria that was used to reject transitory?

I tend to be skeptical of anyone who accuses others of lying when there are obviously simpler reasonable explanations: it’s hard to predict how the entire economy will react to turning off the spigot.

zozbot2345• 4 years ago

Their only option is to act against inflation, it's a choice of when not if. And the more they wait, the more painful for the economy as a whole.

tootie4• 4 years ago

Yeah, this is an odd take. 8% inflation is not great, but it's hardly a historic disaster. Especially given the even odder take that they think the corresponding rise in wages somehow makes it worse. The fiscal stimulus of the pandemic was perhaps too large, but it was extremely effective at forestalling catastrophe in the wake of a black swan event. The mistake was probably tightening too slowly from the 2007-era stimulus that left us without a lot of room to maneuver.

If you want to point a finger, maybe point it at the politician who threatened the Fed chair for not setting negative rates 2 years ago.

thoughtstheseus5• 4 years ago

Agreed. The Fed is racing to raise rates so they have something to cut when the economy turns south.

We can also blame the politicians who cut taxes in the longest, largest bull market for financial assets in history.

vimy2• 4 years ago

Is inflation really 8 % though? Real number is probably closer to 20 %.

overtonwhy• 4 years ago

It is a single month of single year over year inflation measurement that is comparing to a year with a global pandemic in full swing. Inflation and gas prices are Republican talking points to "own the libs". Give it the proper context.

pfortuny• 4 years ago

Playing with 0 interest rates as if that were in the least rational was the greatest mistake.

Nobody should have the power to subvert the meaning of time.

We take the ministry of truth seriously (“the past can be changed”) and get scared by that. Saying thay time is worthless is more or less as grave.

toomuchtodo2• 4 years ago

Fiat is an artificial construct, as are asset values and prices, and the cost of capital/money. No one is guaranteed a rate of return. The whole point of monetary policy is to juggle the imaginary to realize a certain reality, ZIRP, NIRP, rapidly increasing PIRP, etc.

User232• 4 years ago

The natural rate of interest is zero. Any positive interest rate results, in aggregate, in unserviceable household debts[1]. This is elementary for anyone with even a simple and accurate understanding of the US monetary system.

Usury is bad and there are other ways to finance underwriting and the other socially useful activities banks perform.

[1] Currency issuers can always service debts in the currency they issue of course. Those liabilities are so operationally different from household debts though that they probably ought to be called by a different name altogether.

azth• 4 years ago

Nobody should have the power to subvert the meaning of time.

Interesting take, but isn't setting an interest rate doing exactly that, whatever that rate is?

This is why, the Islamic approach is the most superior one: no lending money with interest, period. This means at least two things:

(1) Lending money becomes an act of charity, since you cannot profit off of it.

(2) You want to tap into time value of money? Invest it in a proper risk sharing manner that is fair to all parties engaged.

It would be a very different world had we implemented this approach.

RealityVoid2• 4 years ago

Here's my take: inflation sucks, but they should just let it run its course. For several reasons, but also, my understanding is that the US debt is denominated in USD, so they would effectively be reducing their debt.

My suspicion is that the FED will mostly be choosing to inflation to run its course rather than raising rates too aggressively, and they are trying to pull off a balancing act. Once the current panic subsides, probably things will stabilize.

technotony• 4 years ago

You can't do that though because at a certain point inflation expectations become inbuilt and then people want to get paid more, spend more now rather than save (expecting higher prices next year) etc etc. This makes those inflation expectations self-fulfilling. The fed really needs to be aggressive enough to affect those expectations.

trashtester• 4 years ago

Inflation doesn't "run its course". It picks up speed until it is stopped. Eventually you end up in hyperinflation, when nobody wants to hold cash for any longer than necessary.

As a side effect, the government loses the ability to issue bonds, as there will be no new buyers.

The only way to prevent this is to make sure interest rates do not stay too low below inflation for too long, and in the end, iterest rates may have to go above inflation to actually get it back down.

triceratops• 4 years ago

It's "the Fed" not "the FED".

RickJWagner• 4 years ago

The historic mistake was the whistling past the graveyard.

'Transient' was the word used not long ago.

Then came the half-hearted small rate raises.

Now the piper must be paid.

mattwilsonn8885• 4 years ago

The dollar is highly valuable largely from the promise of its central banks to repay debts - for which the US has a strong reputation of upholding. Now that the Fed is playing games with people's expectations of their plans for interest rates (to scare the market and lower demand without raising rates in proportion), they are also poised to devalue the repayment of their loans while indicating that they will not devalue those repayments.

So in combination with inflation that will not slow down as much as it needs to, the trust which made the U.S. dollar the global reserve currency in the first place is also eroding.

Inspired by the final statement from the article:

"Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.) It might add an inflation risk premium to America’s cost of borrowing. And if even America broke its inflation promises in tough times, investors might worry that other central banks—many of which are looking over their shoulders at indebted governments—would do the same. In the 1980s the recessions brought about by Paul Volcker’s Fed laid the foundations for inflation-targeting regimes worldwide. Every month inflation runs too hot, part of that hard-won credibility ebbs away."

deltarholamda• 4 years ago

I've read a lot of opinions from credible people who take opposite positions on every conceivable issue in regards to the economy. The state of the dollar as the reserve currency for the world is just one of many examples. At a certain point it starts to feel like nobody really knows for sure, and they're largely just guessing.

It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.

phkahler2• 4 years ago

> Social Security unfunded liabilities.

Social Security isn't unfunded. The main issue there is that it invests the money in US treasury bonds. As those bonds mature they reinvest in new bonds. That's all find and dandy, but it creates a system where SS is constantly "buying" bonds and the treasury is constantly "paying" SS. This has historically looked like a flow of money from SS into the treasury. As the boomers retire, the net flow will have to reverse, meaning the treasury will have to pay back a bunch of money that it borrowed from the Social Security administration. That's fine, they have several trillion dollars invested. The big issue is that congress has made a habit of spending other peoples money and sees a huge hole in their budget because of this situation.

Social Security is not an "entitlement" it's more like a contract and congress keeps wanting to default on their end of the deal. The amount a person gets from SS is not much more than their lifetime contributions - the average rate of return for an individual is very low, but that's not what the "problem" is.

puranjay2• 4 years ago

Wont the reserves seizure they pulled off with Russia also contribute to this trust deficit?

PKop3• 4 years ago

I'd add freezing of Russian reserves worth hundreds of billions of dollars to the incremental loss of faith in the $.

zozbot2345• 4 years ago

We need a new grassroots movement to combat inflation throughout the economy and society, along the lines of the historically successful https://en.wikipedia.org/wiki/Whip_inflation_now campaign.

tinalumfoil• 4 years ago

Your own link described WIN as, "one of the biggest government public relations blunders ever".

germinalphrase• 4 years ago

That Wikipedia page makes WIN sound less than successful.

tootie4• 4 years ago

This sounds like the 1970s version of telling millennials to stop buying avocado toast.

mensetmanusman• 4 years ago

There are no right answers when a pandemic shuts down the world.

650• 4 years ago

The pandemic didn't shut it down, politicians and social consensus did. I said this at the start of lockdowns and distribution in excess to business, and I'll say it now.

It's a fine line between sacrificing the future "economy" to save lives now.

We will have to see if overall life loss is less or more due to the human interventions during covid mania.

Philadelphia• 4 years ago

At least 6 million people died worldwide so far, including more than 1 million in the US. In what universe would letting even more people die improve the economy? Dead people don’t work or spend.

hourago2• 4 years ago

Full hospitals and collapsing health care would have not improved the economy. You point the downsides of lock downs without mentioning why were enacted.

When mothers die giving bird, car accidents become mortal, heart attacks are not treated because there are no beds in the hospital people tend to revolt. But because it did not happen you seem to argue that the remedy was not needed.

readthenotes12• 4 years ago

Any article that claims the Fed has the tools to address supply troubles is too shallow to believe.

Any article that talks about the Fed's response without talking about Powell's reconfirmation is really not worth reading.

Once his job was secure, inflation was priority and he set out to destroy demand to reduce wages and the ease the burden on the broken supply chain that he no tools to fix.

matwood2• 4 years ago

Pretty much. He's going to have to force demand to recession levels to deal with the supply issues still going on from covid and now the war. It's like people forget that inflation is not only too much money, but too much money chasing too few goods.

wafriedemann4• 4 years ago

I dont't think so, because supply can't keep up with demand. So lowering demand even significantly would have no impact on supply, i.e. the economic output.

mint2• 4 years ago

For example how’s he going to fix housing inflation that’s due to the horribly broken housing supply that was basically a time bomb left by single family zoning.

vinyl72• 4 years ago

Kill demand by raising mortgage interest rates. Houses will stay on the market longer and cause prices to fall. The run up over the last two years was because of FOMO and speculation more so than shortages.

hammock• 4 years ago

Your comment will go unappreciated because it’s not that accessible to a broad audience, but you are right the goal right now is demand destruction.

basch2• 4 years ago

Price of consumer goods is up, and one quarter ago every company was making record profits, but obviously its the FEDs fault corporate America started price gouging.

readthenotes12• 4 years ago

That is the third leg of inflation.

It is fairly well known that one of the predictors of future inflation is the belief in it - - a self-fulfilling prophecy.

The Fed does not have any tools to address businesses who take advantage of people believing that the prices should be higher to raise their price and in the short term their profit.

The fed has one Cannon to use, reduce or expand the money supply, and it only hits one of the three sources for inflation

ayngg• 4 years ago

It looks like they have the choice of saving the dollar or saving the economy, and it seems like in their attempt for both fixing inflation while having a "soft landing," they may get neither.

csense• 4 years ago

If inflation's so bad, why are gold and Bitcoin not posting massive gains?

fallingfrog2• 4 years ago

Those are just vehicles for speculation like everything else.

danuker3• 4 years ago

Because people are selling investments to buy food and fuel.

If you want short-term inflation protection, add some commodities to your portfolio.

jollybean3• 4 years ago

No, they are selling BTC because markets are crashing, they need the cash for other things.

BTC will trend perfectly inline with stock valuations as a function of excess liquidity, kind of indicating they are not what they are supposed to be.

They are a fun speculative instrument, when things get tough, people stop pretending and move onto other things.

That may change, but unlikely.

I see a future crypto 'mapped' to the real world in the future some how, not fully but only partically decentralized, that could work.

programmarchy• 4 years ago

Additionally, as whales exit their positions, they will be sitting on a mountain of cash ready to buy real assets in a fire sale once the bubble pops.

deltree72• 4 years ago

because there is no natural law that says Gold/Bitcoin will do well during inflation. Like all non-cash generating assets, it is driven by supply/demand and speculation (nothing to do with inflation protection)

It is the snakeoil people who promised that and gullible idiots believed/memed/tiktoked that.

mattwilsonn8885• 4 years ago

Inflation is a money supply issue, especially right now - money supply is directly relevant to inflation and hard assets. The reason these assets are not up is because the Fed is threatening huge constrictions to the supply of money which people are currently believing.

PKop3• 4 years ago

Because the Fed is planning on raising rates and initiating QT for multiple months ahead, and they expect these actions to tighten monetary conditions and lower asset prices. If Fed actually does do this for a sustained period of time, everything but the dollar will be crushed, even US treasuries. It would be the polar opposite of printer go brrr.... maybe, vacuum go vrooom, sucking up all the liquidity and decreasing the money supply. If QE/rock bottom rates = everything bubble, the opposite would mean.... pop.

At some point if/when this course of action becomes untenable due to recession/unemployment/too high interest rates given amount of debt in economy, and Fed reverses course (which they did much earlier last tightening cycle in 2018 when markets tanked), those two assets should rise again. Gold particularly falls when real interest rates rise. But, it is likely they are more serious about taking assets down and essentially inducing a recession given the persistent high inflation. The result of fighting that to any real degree means everything keeps going down...which is literally their goal (the reverse wealth affect to slow inflation).

legutierr2• 4 years ago

At some point if/when this course of action becomes untenable due to recession/unemployment/too high interest rates given amount of debt in economy, and Fed reverses course (which they did much earlier last tightening cycle in 2018 when markets tanked), those two assets should rise again.

Right now unemployment is under 4%. The Fed has a lot of leeway to raise rates before what they are doing affects employment, and I'm not sure at all that they will allow unemployment to get too high, if they can help it.

gman2093• 4 years ago

You can't eat gold or bitcoins.

matwood2• 4 years ago

Assets tend to correlate in volatile markets. There are plenty of papers discussing this effect. Because of diversification, people often need to sell higher performing assets to cover lowering performing ones.

A friend ran a successful small investment fund, and still went out of business during the last down turn because all his clients had to pull their money out to cover losses elsewhere.

cmrdporcupine• 4 years ago

Jamie Dimon: "The higher [interest] rates go, the more cost to hold an asset that does not produce anything."

https://www.youtube.com/watch?v=Q-5US4J03Wo 13:00 mark.

Interest rates being higher means: get your money out of that speculative crap and into something where you can take advantage of the higher rates.

But also because Bitcoin isn't what its advocates claim it is? It's speculation, not currency. Not a hedge against inflation.

In fact it's inflated worse than USD. Worth 40% less than it was a year ago.

rrrrrrrrrrrryan• 4 years ago

The flight to safety is a little different this time. People seem to be investing in inflation itself: commodities have been on an absolute tear.

https://finance.yahoo.com/quote/DJP

fallingfrog2• 4 years ago

The inflation/bubble scenario we're in has been a long time coming. I knew it would end this way- lots of people did- keep on propping up the whole economy with printed money long enough and eventually it'll stop working. This time there's no stimulus to save us, because everything is already tapped out. Honestly though, I really thought they would come to their senses back in 2015 or 2016 when they should have closed the taps. Instead they blew everything to magnificent proportions, and the crash will be equally magnificent.

dralley• 4 years ago

Of course, it doesn't help when you have politicians constantly making open threats against raising interest rates.

https://www.wsj.com/articles/trump-complains-about-rising-in...

https://www.nytimes.com/2019/09/11/business/economy/bonehead...

Not that the Fed doesn't deserve criticism, because they do, but the public would be pissed about many of the measures that combat inflation as well, and the politicians would make sure they know who to blame (hint: not themselves).

nightski2• 4 years ago

It doesn't particularly hurt either. The Fed is supposed to act independently and is solely responsible for its actions. Trying to stir up political controversy is pure FUD.

kadoban• 4 years ago

It's _supposed_ to be independent. That's not the same thing as actually being independent.

zozbot2345• 4 years ago

There's a real alternative to higher interest rates: bring government spending under control. Notably, this was done during the 1990s Clinton administrations and it worked quite well.

zthrowaway2• 4 years ago

This is the real answer. Everything else is just arguing about what type of band-aid we use. Root of the problem with inflation in this nation is out of control government spending and printing of money. Unfortunately no politician will seriously campaign to do this, as combating inflation results in a drop in economic boost, potential unemployment, etc. It stings at first but the other end of it is worth doing. Our hand will be forced one way or another to hit the brakes.

Supermancho• 4 years ago

Notably, this was done during the 1990s Clinton administrations and it worked quite well.

- in the summer of 1995, the Clinton administration admitted that “balancing the budget is not one of our top priorities.”

"It worked quite well" meaning:

"We have a balanced budget today that is mostly a result of 1) an exceptionally strong economy that is creating gobs of new tax revenues and 2) a shrinking military budget." - Stephen Moore

https://archive.ph/OD4nl#selection-1643.78-1643.91

Whoever was to blame, the issue is that politicians have been disconnected from spending constraints for too long. There are no controls that impact them when they fail to perform one of their basic duties. Deciding how to spend tax revenue has morphed into deciding how to spend future revenue across all strata of politics (local to federal). The 91fwy express lanes from 1994 are STILL tolls, which was supposed to be converted to additional freeway lanes decades ago, based on the initial project. Nope, money in the hand and promises of money in the future, is what the cities want. From this, we get wasteful slush-fund industries (eg lotteries, etc).

frgtpsswrdlame• 4 years ago

If inflation is occurring in Oil & Gas because of the crisis in Ukraine and inflation is occurring in eggs and beef because of monopolistic price gouging, then what is the point of lowering government spending? End the crisis in Ukraine, bring Russian oil back on to the market for its correct price and discipline the companies currently making record profits off record prices for goods.

somewhereoutth3• 4 years ago

Or equivalently, tax rich people more.

Interest rates should be returned to their norm, around 5%, for sound resource allocation (i.e. the time value of money is priced correctly).

Fiscal policy, specifically wealth taxes, should be used to cushion low and middle incomes from this painful readjustment.

Hammershaft2• 4 years ago

Very difficult to directly attribute low inflation of the 90s to Gov spending. 90s also had a record surge in economic productivity partially brought on by the integration of computers.

dimitar• 4 years ago

It can help a bit, but fiscal policy is not sufficiently effective with a floating exchange rate, unless the economy is in a liquidity trap (which the USA just exited). The reason is when the rates are low, the removed government spending it will be replaced with private.

A budget takes time to make, vote on and spend (or not spend). To be effective it must also align with monetary policy. Changing rates has a much quicker effect.

By the time Congress agrees on what to cut the inflation might even be low - due to Fed action, a recession, or repairing of the post-Covid logistic issues.

rayiner• 4 years ago

Bringing government spending under control is politically impossible. A lot of Reagan Republicans are now stuck in the Democratic Party, at least at the national level. And a significant slice of the old FDR coalition, working class people in rural states, are now in the GOP. Immigration has thrown a wrench in everything, because both parties now have an incentive to push government spending (as both Trump and Biden did). Democrats, to keep immigrants, who lean socially conservative but like immigrants in the past value social services, in a coalition with white social liberals. For Republicans, abandoning fiscal austerity is a way to peel off the more conservative segments of those same voters.

It’s the same play Tories have run in the UK, for much the same reasons—winning minorities and working class rural people away from Labour. And it’s resulted in exploding government spending there too.

bequanna2• 4 years ago

Sigh, just more #EverythingIDontLikeIsTrumpsFault

Trump wasn’t president in 2021. Why didn’t the FED act to raise rates then?

systemvoltage2• 4 years ago

Yea exactly, OP’s take is disingenuous.

arcticbull2• 4 years ago

As Yellen said, the Fed was right about inflation - up until 2022 hit. We were in a vulnerable position, with an extended but not inherently problematic money supply. What happened in 2022 was a mix of:

- an un-clean reopening where many states just dropped restrictions and let people go all of a sudden.

- combined with snarled supply chains.

- combined with a labor shortage.

And then on top of that:

- a war between a major oil exporter (Russia) and a major food exporter (Ukraine).

- COVID lockdowns in China making goods yet more scarce.

The Fed was in a tough spot but made good calls given the information available. Then the new stuff came in and all of a sudden we found ourselves in a pickle. The issue isn't IMO inherently too much money, it's suddenly too little supply.

All the Fed can do is nuke demand. We will not have a good time.

twblalock• 4 years ago

The elephant in the room is that the Fed had been juicing the economy with QE and low interest rates since the 2008 crisis, and did not stop after that crisis ended despite having a decade to do so.

blockwriter• 4 years ago

What do you mean by un-clean reopening? Do you think policies ostensibly meant for favorable public health health outcomes should have been partially or selectively maintained for purely economic reasons? The former motivation was suspect in the extreme, while the latter is entirely inhumane.

systemvoltage2• 4 years ago

The WSJ article is from 2018 and has nothing to do with post-COVID situation. NYT article is from 2019.

starkd2• 4 years ago

Excellent point. I remember when he criticised Powell for raising rates back in 2018. It seemed to me to be the perfect time to normalize rates.

arrosenberg4• 4 years ago

The Fed doesn't have the tools to deal with this problem, so there is no point in blaming them. The Fed can add to the money supply and they can regulate the velocity of money, but they can't destroy it. Congress, and only Congress, can reduce the money supply by taxing and using the taxes to pay back the original issuance to balance the books.

As we know, conservatives in Congress (which includes a bunch of Democratic members) refuse to pass taxes unless they fall disproportionately on the poor. Thus, we are unlikely to see a real resolution to this problem, just more can kicking.

zozbot2345• 4 years ago

The Fed can absolutely reduce the money supply, by selling assets that they're holding on their books. You're right though that an austerity policy by Congress (running budget surpluses by lowering spending and/or increasing taxes) would have much the same effect.

arrosenberg4• 4 years ago

Are they actually able to sell those assets? My understanding may be incomplete, but it seems like most of those assets are distressed - that's the whole reason the fed is holding them in the first place.

rhexs• 4 years ago

Or they could just spend less. The solution is in middle, but good luck getting that across in these polarized times.

I think there will be more willingness to negotiate across the aisle as inflation/fuel continues to heat up.

s1artibartfast• 4 years ago

Monetary policy just borrows from the future to spend in the present. Like any borrowing, this can be smart or stupid. The federal government policy over borrowed and spent on frivolous things that did not produce a return. You can absolutely hold them accountable for past actions

adam_arthur5• 4 years ago

The Fed can destroy money via QT. And higher rates reduce the multiplier/power of money.

Also inflation is primarily driven by middle/lower class having higher disposable income, not upper class. The propensity to spend a marginal dollar goes up significantly, the poorer you are. If Jeff Bezos sells $1B of amazon tomorrow, it's likely disinflationary in practice because he's taking that money from buyers and not spending it at the same rate

It's possible that forced selling of assets through new tax schemes could be disinflationary by routing money from buyers to the government via taxes. But then again, most of the money in equities is owned by wealthy/low propensity to consume people

arrosenberg4• 4 years ago

There is definitely inflation due to the upper class having more money, they are just using it to buy assets instead of goods. Cheap money caused consolidation and asset price increases - you can slow it down with QT, but I don’t think you can re-rationalize the economy without involving the FTC and Congress to unwind the effects. The asset consolidation is one of the major factors driving the inflation on goods.

phkahler2• 4 years ago

The Fed has been given two objectives: 1) Regulate inflation and 2) Regulate the economy. They only have one knob to turn - interest rates. QE might be considered a second knob but it's really just an extreme booster on the first knob used when it reaches the end of travel (zero).

> and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.

How about congress look in the mirror and all the free money they've been handing out AND spending.

On a related note, why does boosting the economy always involve borrowing money - either on the consumer side or the government side? We never talk about debt (deficit isn't debt, it's the rate of change of debt). Fiscal responsibility is always pushed aside for short term goals.

thepasswordis• 4 years ago

Yes, and the administration has also made historic mistakes on energy and foreign policy.

We've got a brewing war in China.

We've got an active war in Eastern Europe.

People literally cannot feed their infant children.

Is there anybody who seriously and honestly believes that Joe Biden should be in charge of assembling a team to solve these issues? Does anybody seriously believe that people like Pete Buttigieg should be in charge of doing anything to help alleviate these supply chain and energy problems?

rnk5• 4 years ago

Trump was the one who tried his hardest to screw China. Trump got his Congress to pass unneeded tax cuts. I agree Dems went along w COVID stimulus. Trump wanted on more stimulus, Congress deferred, then Biden got one. Biden didn't cause the war in Ukraine, if anything Trump encouraged it by talking about getting the US out of NATO.

Jonanin• 4 years ago

One thing worth noting is that one minor reason the dollar is very strong now is that the Fed was actually the first central bank to start raising rates. A better title is probably: "Central banks around the world have made a historic mistake on inflation"

howmayiannoyyou• 4 years ago

Can someone help me understand why the economist is blaming the US Federal Reserve when the US Congress threw roughly 4 trillion dollars at the economy in the form of:

...the Coronavirus Preparedness and Response Supplemental Appropriations Act (2 trillion)

...Families First Coronavirus Response Act (FFCRA)

...Coronavirus Aid, Relief, and Economic Security (CARES) Act

...Lost Wages Assistance (LWA) Program

...the 12/20 CAA

...the American Rescue Plan Act (1.9 trillion)?

Perhaps I'm being a tad cynical but this seems a lot like scapegoating so Congress can escape liability for legislation it thought (wrongly) would lead to a glorious congressional reelection landslide in 2022.

adastra22• 4 years ago

The Fed didn’t pull the trigger, but they didn’t do anything to mitigate Congress’ bad decision making either. They spent a year with their head in the sand pretending inflation was ‘transitory’ (wtf does that mean anyway?) before raising rates by any significant amount—which they still haven’t really done.

emn13• 4 years ago

Add to that the corporate tax cuts a few years ago which are of a similar scale (though harder to account for), and didn't even have the excuse of pandemic to support it.

I do think that there's a bit much teeth gnashing and blame flinging going around in any case - a 10% inflation for 1 year after years of low inflation isn't the end of the world - if it stays at that. And some of this was almost inevitable given all the shocks of the past few years - how realistic was it that there wasn't going to be some economic hit down the line?

It seems rather plausible that earlier, higher rate raises might well have caused a recession; and had the pandemic exit played out only slightly differently and the fed raised rates earlier - we might be making the opposite complaint now. Even now, it's not like higher interest rates won't cause damage. And to the extent that some of the inflation is due to supply shocks, raising interest rates won't even do as much as you'd like, all while causing more damage than is ideal.

By contrast, it's worth noting that the eurozone interest is still at -0.50%, and they're talking of months to even return to 0. The challenges may not be identical, but it's no coincidence they've not rushed to raise rates so far either.

bradgessler• 4 years ago

They touched on the America Rescue Plan Act:

—

Uncle Sam has been on a unique path because of Mr Biden’s excessive $1.9trn fiscal stimulus, which passed in March 2021. It added extra oomph to an economy that was already recovering fast after multiple rounds of spending, and brought the total pandemic stimulus to 25% of GDP—the highest in the rich world. As the White House hit the accelerator, the Fed should have applied the brakes. It did not.

—

I didn’t see any of the others mentioned.

Rury2• 4 years ago

That's typical of governments going through a deleveraging. Ray Dalio's "How the economic machine works in 30 minutes" video on youtube explains the situation quite well. That said though, the money obtained for this stimulus was largely printed by the Fed (a horrible decision IMO).

But I wouldn't put the blame for this mess solely on the Fed and government. Really it's society's collective greed, self-centeredness, incompetence, and financial irresponsibility of overpromising/can-kicking for several decades that's got us here...

j_m_b2• 4 years ago

Everyone is focused on the rates, but what about the 2T USD of mortgage backed securities on the Fed's balance sheet? They promised to wind-down their holdings of MBS but they have persistently held them all the while housing prices have continued to sore.

Another thing that bothers me about this is the fact that they don't even include housing in their inflation measurement... despite owning MBS!

jacobolus2• 4 years ago

Shelter accounts for 33% of the CPI’s bundle of goods. So “don't even include housing in their inflation measurement” is not a good summary.

Also the CPI is computed by the Bureau of Labor Statistics, not the Federal Reserve.

j_m_b2• 4 years ago

The Fed doesn't use the CPI, they use the PCE. The PCE is calculated based on rental prices, not home prices. I should have said more accurately that they don't include the PRICE of homes in their inflation measurement. It seems like it would be quite important when you are holding 2T in MBS.

wafriedemann4• 4 years ago

If you ask journalists everything is mono-causal all the time. There are several factors that all play a significant role imho. FED not raising rates when the economy was already in full recovery is one. Then excessive fiscal spending during Corona while the economy was partially shut down. And then of course the war in Ukraine. Another factor China's ridiculous No-Covid strategy (if it's even about Covid).

somewhereoutth3• 4 years ago

China's zero Covid strategy has saved, and continues to save, millions of lives.

Over any reasonable time period, the economic benefits of having a healthy populace out weigh the temporary cost of lockdowns. Our current problems with inflation may well be in part caused by workers unable to work due to chronic illness caused by Covid (and indeed the endless rounds of acute illness too).

ckastner• 4 years ago

Note that this article is from April 23rd, just before the recent escalation.

ParksNet• 4 years ago

We'll only solve inflation when we solve the Welfare state. We need to abandon unemployment and single-parenthood payments, and raise the pension access age to 70 alongside a privatization of social security.

This will force people back into the workforce and free up capital so that we can friend-shore supply chains.

swills• 4 years ago

I liked The Atlantic's article on this topic:

https://www.theatlantic.com/ideas/archive/2022/06/what-is-ca...

t_mann• 4 years ago

Funny that after almost one-and-a-half decades of excessive monetary expansion the reasons for inflation lie so far outside the realm of monetary policy: zero-Covid policies in China that have lastingly disrupted global supply chains, a terrible war that has bogged down 40% of the world's grain supply, highly justified sanctions that drive up energy prices, and a domestic workforce that has become disillusioned about the work treadmill. The Economist very liberally glances over those issues for the sake of a strong-hitting headline and a compelling story.

The Fed has made a historic mistake on inflation

Related Stories