Do It for the Planet

In an article at the Washington Post Brit econ writer Sebastian Mallaby warns the Federal Reserve that they’ve got to stop screwing up. He opens by noting that the FOMC made one forgivable error:

The forgivable error began in the summer of 2021. By then, the Trump administration’s stimulus had been amplified by a far larger Biden package; in the second quarter, core inflation came in at 6.1 percent, way above the Fed’s target. But the Fed dismissed this surge as a “transitory.” A semiconductor shortage was causing a temporary spike in car prices, the central bank argued. Workers’ fear of covid-19 was delaying the return to work and causing temporary bottlenecks.

and another much more serious error:

The less forgivable mistake came at the start of this year. It was not a forecasting error, it was a failure of courage and a triumph of inertia. The Fed acknowledged inflation. But, anxious about upsetting financial markets and reluctant to grapple with the full implications of its error, it refused to rise to the challenge.

At the close of the Fed’s policy meeting in January, Chair Jerome H. Powell described inflation as “elevated.” But he declined to raise the interest rate. At the next meeting, in mid-March, Powell confessed that inflation was “well above” the Fed’s target. Yet still he raised interest rates by only a quarter of a percentage point.

Powell embraced this gradualism, moreover, even though the Ukraine war and the associated sanctions were driving commodity prices skyward. The earlier, forgivable error had been compounded by a huge stroke of bad luck. But rather than scramble to get on top of the problem, the Fed played tortoise.

concluding:

Three decades ago, when the Fed was less committee-driven and more under the sway of an imperial chairman, it was willing to hike rates with less warning and more aggression. In the tightening cycle of 1994, it raised by three-quarters of a percent at a single meeting. Wall Street screamed murder, but Main Street came out fine. Inflation fell, and there was no recession.

Today’s Fed should ponder this. To preserve its credibility as an inflation fighter — and hence its ability to react swiftly to growth shocks — the Fed must react equally swiftly when prices accelerate upward. Sometimes it’s okay to upset Wall Street, and sometimes the best course is the monetary equivalent of a hand-brake turn. Once upon a time, the Fed knew this.

I disagree with the motives to which he attributes the Fed’s reluctance. I think the Federal Reserve is attempting to maintain its independence. avoid criticism that they’re trying to scuttle the Biden Administration, and that Jerome Powell is attempting to hold onto the job of Federal Reserve Chairman for a while longer. The three are intertwined but in trying to avoid appearing politicized they’re behaving in a very politicized way. That is called “cutting off your nose to spite your face”. Those incentives will become stronger as November nears. Consequently, I expect the FOMC to take actions that aren’t nearly as strong as they should be later than they should take them and for inflation to rise higher and continue longer.

I don’t believe that Sebastian Mallaby is some sort of crypto-Republican. I think he’s looking at the Fed’s actions, looking at the rate of inflation, and reaching reasonable conclusions.

My own view is that I wish that Ben Bernanke, Mr. Powell’s predecessor, hadn’t done as much quantitative easing as he did and I wish that Janet Yellen had raised interest rates, if only to demonstrate that the Fed still had the stones to do so. Mr. Powell is now in the position of having done too little too late, not just for the U. S. economy but for the global economy.