Wednesday, June 7

Opinion | Jerome Powell, Inflation Fighter?

Federal Reserve Chairman Jerome Powell speaks during a virtual press conference on March 16.


Liu Jie/Zuma Press

The Federal Reserve on Wednesday finally began to move to control the worst inflation in 40 years, and Chairman

Jerome Powell

almost sounded like a born-again inflation fighter. But the measure of the Fed’s problem is that even 11 projected interest-rate increases in the next two years would keep rates well below the level of inflation.

“We have to restore price stability,” Mr. Powell said more than once during his press conference. His tone was markedly more hawkish than we’ve heard before, and it sounds like he and the rest of the Federal Open Market Committee (FOMC) have been mugged by price reality. The central bank’s year-long illusion that inflation will quickly subside has vanished.

The Fed’s action Wednesday to raise the fed funds rates by 25 basis points was modest and expected. The surprise was in the forecast for the next two years. In December the median prediction of Fed governors and bank presidents was four 25-point increases by the end of this year. Now it’s seven, plus another four rate hikes in 2023.

The Fed also climbed down from the fence on when to start shrinking the $9 trillion balance sheet it has built up to ease financial conditions. The FOMC says it will begin to reduce its holdings of Treasurys and mortgage-backed securities “at a coming meeting.” This sounds like sooner rather than later. This “quantitative tightening” is long overdue, and inflation might be much lower than it is had the Fed started doing this a year ago.

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. That’s the rate of so-called personal-consumption expenditure (PCE) inflation, which is the Fed’s preferred measure and is lower than the consumer-price index. PCE inflation 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.

At his press conference, Mr. Powell declared that the U.S. economy “is very strong.” But it’s notable that the Fed sages downgraded their median forecast for economic growth this year to 2.8% from 4% in December. It’s also notable that, for the first time in perhaps two years, the FOMC statement didn’t warn about the economic risks of the pandemic. The Chairman cited the war in Ukraine several times as a risk to both growth and inflation.

Every canny Fed Chairman needs an “exogenous” explanation other than monetary policy for economic problems. Mr. Powell has switched seamlessly from pandemic to war and oil prices. It’s still not enough to absolve the Fed from the inflation mess it helped to cause and now must find a way to clean up.

Main Street (11/15/21): “Inflation is just like alcoholism,” said economist Milton Friedman. “In both cases…the good effects come first, the bad effects only come later.” Could there be a lesson here for Joe Biden? Images: Bettmann Archive/Getty Images Composite: Mark Kelly

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Appeared in the March 17, 2022, print edition.

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