Are the Fed Governors “Chickenhawks”?

The editors of the Wall Street Journal are disappointed with the Federal Reserve’s Federal Open Market Committee:

The median estimate by Fed officials for personal-consumption expenditure inflation, the Fed’s preferred measure, jumped to 5.3% for this year. How could it not given reality? But they estimate that PCE inflation will crash in 2022 to 2.6%, and keep falling after that.

From this comforting scenario flows the FOMC’s modest policy shifts. The Fed will speed up its tapering of bond purchases, finishing in March instead of June. This isn’t monetary tightening—it’s merely a faster reduction of extraordinary monetary ease. The central bank’s balance sheet will keep growing for three more months even as inflation is running at nearly 7%. Amazing.

Mr. Powell made clear that interest-rate increases won’t begin until after its bond taper ends, and then the forecast is for only three quarter-point rate increases in 2022. This means real interest rates, after accounting for inflation, will remain negative throughout next year. This isn’t a hawkish policy, and the happy reaction of the stock market suggests that investors see a reduced threat to asset prices from higher rates.

There were no dissents on the FOMC, as Mr. Powell was eager to underscore. That’s a surprise given the gulf this year between the central bank’s predictions and inflation reality, but then conformity has been a hallmark of the Powell Fed.

Perhaps the FOMC members want to show solidarity as Mr. Powell and Fed governor Lael Brainard face Senate confirmation hearings—Mr. Powell for another four as chairman and Ms. Brainard as vice chair.

Mr. Powell’s strategy seems to be to steer through his confirmation by talking tougher on inflation while doing little about it anytime soon. The Senators can decide if they feel as confident as the Fed chairman does that he has it all under control.

Unless the increases in prices abate soon, we’ll start seeing demands for “cost of living” wage increases which risks inducing a wage/price spiral which could make the present situation self-sustaining. None of the remediations at that point are particularly appealing.

The Biden Administration could be moved to impose wage and price controls as I intimated yesterday or the Fed could raise interest rates quickly and sharply which under present circumstances would be likely to throw the economy into a tailspin.