File photo of Federal Reserve Chairman Jerome H. Powell. Photo Credit: Federal Reserve The Fed Is Finally Seeing The Magnitude Of The Mess It Created – OpEd September 24, 2022 By Ryan McMaken https://www.eurasiareview.com/24092...ng-the-magnitude-of-the-mess-it-created-oped/ When asked about price inflation in his Sunday interview with 60 Minutes, President Biden claimed that inflation “was up just an inch…hardly at all.” Biden continued the dishonest tactic of focuses on month-to-month price inflation growth as a means of obscuring the 40-year highs in year-over-year inflation. This strategy may yet work to placate the most ignorant voters, but people who are paying attention know that price inflation continues to soar. Thus, while Biden may be pretending that it’s all no big deal, the Federal Reserve knows it better do something about price inflation which even the Fed now admits shows no signs of even moderating. Another 75 Basis Points On Wednesday, the Fed’s Federal Open Market Committee announced that it will again raise the federal funds rate by 75 basis points. According to the FOMC’s press release: Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. … The Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. This is, by far, the most hawkish announcement yet out of the Powell Fed and no doubt reflects the fact the Fed has finally come to terms with the fact that inflation is not transitory—as the Fed long insisted—and is now impossible to deny. Last month, CPI inflation rose 8.2 percent, year over year, marking six months of year-over-year price inflation rates over 8 percent and near 40-year highs. Moreover, in its summary of economic projections, many FOMC committee members said they expected the target policy rate to reach or exceed 4.25 percent this year, and exceed 4.5 percent in 2023. Projections of economic conditions, however, continued to be relatively rosy with the report suggesting that GDP growth will stay above zero for the foreseeable future while unemployment maxes out at only 5 percent. In spite of two quarters in a row of shrinking GDP over the past year, and in spite of many indicators of brewing recession—such as falling home prices and an inverting yield curve—the committee is still clinging to the idea that the Fed can steer a “soft landing” in which inflation will be reined in with no more than some moderate slowing in economic growth. Although the recent hikes in the target fed funds rate suggest an increasingly hawkish position, the Fed nonetheless continues to take only the most tepid steps when it comes to reducing the size of the Fed’s portfolio. Such a move would directly reduce the money supply by reversing QE, and it would also reduce asset prices by producing a small deluge of government bonds and mortgage-backed securities flowing back into the market. While the Fed is allowing some government bonds to continue to roll off the portfolio, we shouldn’t expect any drastic moves here. It’s been nearly four months since the Fed announced plans to reduce the portfolio, yet the actual reduction continues to be miniscule. Moreover, in Powell’s press conference on Wednesday, when asked about selling off the Fed’s mortgage-backed securities, Powell responded “It’s something I think we will turn to, but that time — the time for turning to it has not come … It’s not close.” Even now, after immense and rapid price inflation over the past two years, the Fed is still too afraid of fragility in the housing market to put much of its $2 trillion MBS portfolio back into the private sector. This sends a mixed message as to how much the Fed is really committed to reducing price inflation, but it’s clear Powell was trying to project a hawkish tone on Wednesday overall. Powell spoke of “significantly reducing the size of our balance sheet” and also emphasized that ending the current bout of inflation will require pain in the form of job losses. He also emphasized that there is no short-term solution, strongly implying that the current effort to end inflation could possibly take years. Powell expressed fears that price inflation will become much harder to address once the population comes to expect inflation as routine. He also noted that price inflation in housing “is going to remain high for some time.” Powell then reiterated that there is no way to “wish away” inflation, but that the only way he sees the Fed can do something about inflation is by “slow[ing] the economy.” (See 1:35:00 here.) The question remains, however, as to whether or not the Fed and the federal government can politically tolerate a sizable period of rising interest rates and a decline in the monetary growth rate. A decline in the monetary growth rate is trouble because it points to recession. Our bubble economy is now so addicted to easy money, that even a slowing in monetary expansion can send the economy’s many zombie companies into a tailspin. Rising rates are a problem because they can lead to sizable increase in the federal government’s debt-service payments. This could lead to a fiscal crisis without cuts to popular government spending programs. Virtually no one in Washington wants that. Some key warning signs are already flashing “recession,” such as the inverting yield curve. For example, the 10-year yield minus the 2-year yield has been negative since July, and at the most negative level since the early 1980s. This will amount to immense pressure on the Fed—from wealthy Wall Streeters, elected officials, and corners of the economic Left—to return to quantitative easing. Expect more attacks on the Fed’s tightening policy, but most of these attacks get things backward when it comes to understanding the problem with Fed policy. As even Fed economists are now beginning to understand, the Fed must tighten now or risk truly galloping inflation in the near future. Many casual observers will then view this tightening as the “cause” of the economic pain that will follow. Yet, the Fed’s real incompetence is already behind us. That came over the past decade when the Fed absolutely refused to end its quantitative easing efforts even as the economy was clearly in an accelerating expansion. This was especially obvious after 2017, and yet Powell stuck with the usual monetary inflation, because that was the popular thing to do. Then, when the covid crisis, came, all restraints on monetary inflation were completely abandoned. Now, thanks to Powell’s mistakes, price inflation is supercharged, and even he admits it could take years of economic stagnation or decline to bring it under control. The sheer level of ineptitude would be shocking if it were not so common for central bankers. For those people, their entire “strategy” can be summed up—as Peter St. Onge puts it—”Hike til it breaks, cut til it inflates.” There’s not much more to it than that. That’s the best all those PhD’s at the Fed have managed to come up with. Thanks to Powell and Yellen and Bernanke and Greenspan, we’re living with the consequences of the Greenspan Put, followed by a decade of QE, followed by the “panic and print money” mania of the past two years. It’s great that Powell is finally figuring out what the real world looks like. Unfortunately he’s years behind.
Buckle up, America: The Fed plans to sharply boost unemployment By Irina Ivanova September 23, 2022 https://www.cbsnews.com/news/fed-interest-rates-unemployment-inflation/ In case the U.S. economy wasn't hurting enough already, the Federal Reserve has a message for Americans: It's about to get much more painful. Fed Chair Jerome Powell made that amply clear this week when the central bank projected its benchmark rate hitting 4.4% by the end of the year — even if it causes a recession. "There will very likely be some softening of labor market conditions," Powell said on Wednesday. "We will keep at it until we are confident the job is done." In plain English, that means unemployment. The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today — a number that implies an additional 1.2 million people losing their jobs. "I wish there were a painless way to do that," Powell said. "There isn't." Hurt so good? Here's the idea behind why boosting the nation's unemployment could cool inflation. With an additional million or two people out of work, the newly unemployed and their families would sharply cut back on spending, while for most people who are still working, wage growth would flatline. When companies assume their labor costs are unlikely to rise, the theory goes, they will stop hiking prices. That, in turn, slows the growth in prices. But some economists question whether crushing the job market is necessary to bring inflation to heel. "The Fed clearly wants the labor market to weaken quite sharply. What's not clear to us is why," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a report. He predicted that inflation is set to "plunge" next year as supply chains normalize. The Fed fears a so-called wage-price spiral, in which workers demand higher pay to stay ahead of inflation and companies pass those higher wage costs on to consumers. But experts disagree that wages are the main driver of today's red-hot inflation. While worker pay has risen an average of 5.5% over the last year, it's been eclipsed by even higher price increases. At least half of today's inflation comes from supply-chain issues, noted former Fed economist Claudia Sahm in a tweet. Sahm noted that lower-wage workers today have both benefitted the most from pay increases and been hurt the most by inflation — inflation driven by higher spending by wealthy households rather than people lower down the ladder. Rising rates, falling jobs While the exact relationship between wages and inflation remains under debate, economists are much clearer on how raising interest rates puts people out of work. When rates rise, "Any consumer item that people take on debt to buy — whether that's automobiles or washing machines — gets more expensive," said Josh Bivens, research director at the Economic Policy Institute. That means less work for the people making those cars and washing machines, and eventually, layoffs. Other parts of the economy sensitive to interest rates, such as construction, home sales and mortgage refinancing, also slow down, affecting employment in that sector. In addition, people travel less, leading hotels to reduce staffing to account for lower occupancy rates. Businesses looking to expand — say, a coffee shop chain opening a new branch — are more hesitant to do so when borrowing costs are high. And as people spend less on travel, dining out and entertainment, those hoteliers and restaurateurs will have fewer customers to serve and eventually cut back on staff. "In the service economy, labor is the biggest component of your cost structure, so if you're looking to cut costs, that's where you'll look first," said Peter Boockvar, chief investment officer at the Bleakley Financial Group. While in Boockvar's view hiking rates is needed, the Fed's tactics strike him as aggressive. "I just have a problem with the [Fed's] rapidity and scale," he said. "They're coming on so fast and strong, I'm just worried the economy and markets can't handle it." Layoffs ahead In the meantime, the Fed's existing rate hikes have put about 800,000 job losses in the pipeline, according to predictions from Oxford Economics. "When we look at 2023, we see almost no net hiring in the first quarter and job losses of over 800,000 or 900,000 in the second and third quarter combined," said Nancy Vanden Houten, Oxford's lead U.S. economist. Others predict an even harder landing, with Bank of America expecting a peak unemployment rate of 5.6% next year. That would put an additional 3.2 million people out of work above today's levels. Some policy makers and economists have called out the Fed's aggressive rate hike plans, with Senator Elizabeth Warren saying they "would throw millions of Americans out of work" and Sahm calling them "inexcusable, bordering on dangerous." Powell promised pain, and many are questioning just how much pain is necessary. "Inflation will come down quite a bit faster if we actually hit a recession. But the cost of that is going to be much bigger," said Bivens said. The danger, he added, is that the Fed has set off a runaway train. Once unemployment starts rising sharply, it's hard to make it stop. Rather than neatly halting at the 4.4% rate projected by Fed officials, the jobless numbers could easily keep rising. "This idea that there's an inflation dial that the Fed can just haul on really hard and leave everything else untouched, that's a fallacy," Bivens said. Instead of the soft landing for the economy the Fed says it's aiming for, Bivens added, "we are now pointing the plane at the ground pretty hard and hitting the accelerator."
I suggest Mr. Ryan McMaken read the following material. Until then he'll continue to assume & assess these people as miscalculating bumbling professors. https://u1lib.org/book/11924050/b940f2
Fed should listen to the market sentiment when deciding to change rates. A few guys in power can't beat the wisdom of the crowd.
There's only high inflation because of money printing and dropping interest rates ridiculously low in the first place. The Fed is creating volatility in the markets, they are the authors of it, ramming down rates then knee jerking up again. Investors invest on low rates, then get burnt by high rates, they go out of business pretty quickly.
Stop printing? It may collapse much earlier e.g. if Hank Paulson didn't hand out money, Citi may not exist today. It was easy for Jim Rogers to say, "Let them go bankrupt."
Meanwhile...quietly...the gov't continues to hand out an extra $16B per month in "emergency Covid relief" funds via Medicare subsidies and a host of other cash freebies. Everything the Fed does is lagging. Fiscal policy is throwing gas on the fire and low information voters continue to believe that "an inch" is really nothing at all and things are just fine. What exactly is the Fed supposed to do here?