The Fed wisely ignores Biden and continues tightening
September 22, 2022
When asked what poses the greatest risk to the economy, Nobel laureate Paul Krugman claimed, "Short term, I think the biggest risk is that the Fed will overdo it and it will slam on the brakes too hard." But if past is prologue, the Federal Reserve taking the current inflationary crisis too seriously is the least of anyone's concerns.
Fortunately, Fed Chairman Jerome Powell has heeded the word of his great predecessor Paul Volcker rather than the demagoguery of Krugman and his contemporaries.
Although some Fed board members signified a willingness to vote for an unprecedented rate hike of a full percentage point, this third consecutive hike of 75 basis points should still inspire confidence that the Fed prioritizes crushing the worst inflation since the Volcker era.
Powell's priority is long-term economic health, not maintaining asset bubbles that are driving the stock market or the ephemeral notion of "full employment" or better short-term nominal economic data.
A 100-basis-point hike would have been better, bringing real interest rates closer to inflation. Even so, the central bank has the right intention. The White House spent August falsely claiming that inflation had fallen to “zero” because a demand-driven collapse of energy prices prevented the inflation rate from soaring even higher. But the Fed has ignored all such happy talk, embracing its role as the burster of bubbles. Powell is reining in the easy money binge that has long dominated both Washington and Wall Street.
Contrary to the fantasies spun by the central bankers of the last decade, inflation is and always will be a monetary phenomenon. Powell once claimed that the link between the money supply and inflation had been severed. But the prices of non-energy-based commodities and core goods and services are currently defying this view. He is, fortunately, adjusting his perspective to match the facts.
For all the complex economic innovations of the 21st century, inflation remains an extremely simple phenomenon. Near-zero interest rates cannot go on forever, especially amid a 40% increase in the money supply since the start of the pandemic and pandemic-related restrictions on production.
Until Powell’s comments in Jackson Hole, Wyoming, committing the Fed to combating inflation, investors held out hope that the era of asset bubbles could persist, even if it caused rising unemployment and recession. Now the year will surely close out with a federal funds rate of at least 4%. And that will be the floor for 2023 given that Volcker had to raise rates into the double digits to whip a similar inflation problem in his time.
The pain investors are about to suffer is a price that must be paid to preserve the greenback. If the only value backing our fiat currency is indeed the “full faith and credit of the United States government,” then it's a good thing Powell is taking his job seriously, even if the Biden administration isn’t.
https://www.washingtonexaminer.com/opinion/ed...tightening
September 22, 2022
When asked what poses the greatest risk to the economy, Nobel laureate Paul Krugman claimed, "Short term, I think the biggest risk is that the Fed will overdo it and it will slam on the brakes too hard." But if past is prologue, the Federal Reserve taking the current inflationary crisis too seriously is the least of anyone's concerns.
Fortunately, Fed Chairman Jerome Powell has heeded the word of his great predecessor Paul Volcker rather than the demagoguery of Krugman and his contemporaries.
Although some Fed board members signified a willingness to vote for an unprecedented rate hike of a full percentage point, this third consecutive hike of 75 basis points should still inspire confidence that the Fed prioritizes crushing the worst inflation since the Volcker era.
Powell's priority is long-term economic health, not maintaining asset bubbles that are driving the stock market or the ephemeral notion of "full employment" or better short-term nominal economic data.
A 100-basis-point hike would have been better, bringing real interest rates closer to inflation. Even so, the central bank has the right intention. The White House spent August falsely claiming that inflation had fallen to “zero” because a demand-driven collapse of energy prices prevented the inflation rate from soaring even higher. But the Fed has ignored all such happy talk, embracing its role as the burster of bubbles. Powell is reining in the easy money binge that has long dominated both Washington and Wall Street.
Contrary to the fantasies spun by the central bankers of the last decade, inflation is and always will be a monetary phenomenon. Powell once claimed that the link between the money supply and inflation had been severed. But the prices of non-energy-based commodities and core goods and services are currently defying this view. He is, fortunately, adjusting his perspective to match the facts.
For all the complex economic innovations of the 21st century, inflation remains an extremely simple phenomenon. Near-zero interest rates cannot go on forever, especially amid a 40% increase in the money supply since the start of the pandemic and pandemic-related restrictions on production.
Until Powell’s comments in Jackson Hole, Wyoming, committing the Fed to combating inflation, investors held out hope that the era of asset bubbles could persist, even if it caused rising unemployment and recession. Now the year will surely close out with a federal funds rate of at least 4%. And that will be the floor for 2023 given that Volcker had to raise rates into the double digits to whip a similar inflation problem in his time.
The pain investors are about to suffer is a price that must be paid to preserve the greenback. If the only value backing our fiat currency is indeed the “full faith and credit of the United States government,” then it's a good thing Powell is taking his job seriously, even if the Biden administration isn’t.
https://www.washingtonexaminer.com/opinion/ed...tightening
