It’ll be all housing data and Fedspeak in a holiday-shortened US trading week.
Anyone who isn’t on vacation will hear from at least seven Fed officials in the days ahead. The list includes Jerome Powell, who’s set to regale Congress over two days of what promises to be contentious testimony centered around the Fed’s increasingly urgent efforts to corral generationally high inflation. The Fed described its commitment to the fight as “unconditional” in its semi-annual report released ahead of Powell’s testimony.
Over the weekend, Christopher Waller was unequivocal. “The Fed is ‘all in’ on re-establishing price stability, and part of that effort involves understanding the forces that have boosted inflation and also examining how policymakers responded,” he said, in a Saturday speech for a panel discussion in Dallas called “Monetary Policy at a Crossroads.”
Waller indicated he’ll back another 75bps hike at the July meeting. During the Q&A session, he was very direct. “I don’t care what’s causing inflation, it’s too high,” he said. “It’s my job to get it down [and] higher rates [will] put downward pressure on demand across all sectors.”
On CBS’s “Face the Nation” Sunday, Loretta Mester described recession odds as “going up,” a state of affairs she conceded is “partly” attributable to the Fed waiting too long to pivot. Mester also admitted it’ll likely be “a couple of years” before America sees 2% inflation again.
Mester didn’t predict a recession, but her assessment of the inflation situation was, as she put it, “frank.” “The May CPI report basically was bad across the board,” she told Margaret Brennan. “In fact, some of the measures actually looked worse in May than in April and that was part of the calculus” for last week’s rate hike, the largest single-meeting move since 1994.
Janet Yellen, meanwhile, told ABC’s “This Week” that high inflation “so far” in 2022 “locks in higher inflation for the rest of the year.” “I expect the economy to slow,” she added, before dutifully repeating Joe Biden’s line from an AP interview last week: “I don’t think a recession is at all inevitable.”
To be absolutely clear, I’m not an “anti-establishment” personality, nor have I ever thought of myself as any sort of “contrarian.” My mission in life isn’t to deride “groupthink,” nor do I enjoy demonizing public officials. There are plenty of web portals that specialize in that sort of commentary and this isn’t one of them. That said, it’s exceedingly difficult to take seriously the commentary emanating from Yellen and Fed officials at this juncture.
Economics isn’t a hard science. I’ve written voluminously on this point. If you get it right, luck was involved. If you get it wrong, there was likewise a role for luck, only the bad kind. Larry Summers wouldn’t have been right about inflation post-COVID were it not for the myriad supply-side factors he habitually gives short shrift. Ben Bernanke wouldn’t have been right about disinflation post-GFC were it not for a host of deflationary forces and an inert (or, at the least, underwhelming and inconsistent) fiscal impulse, neither of which was guaranteed to work in his favor. It’s all guesswork.
As I put it in “Economics May Kill Us,” “it’s ludicrous to expect small cadres of technocrats to control the behavior of large numbers of people all with free will and their own ideas about how they’re going to transact with one another on a daily basis.” The problem could be partially “solved” with a central bank digital currency that allows policymakers to exert direct control over spending and saving by, for example, putting an expiration date on a portion of consumers’ funds when the economy needs a boost (“use it or lose it”), blocking certain kinds of discretionary purchases when inflation is too high (“necessities or nothing”) or dynamically adjusting interest rates on personal accounts at the central bank in real-time.
No one would accept such a system in a free society, though, so in most situations, policymakers won’t be able to steer the economy with anything like deft precision. At best, they can prod it at the risk of exacerbating deleterious societal trends (e.g., worsening inequality as the price of harnessing the “wealth effect” in the service of boosting the broader economy) or bludgeon it at the risk of hurting the very same households they’re trying to rescue (e.g., a recession as the price of vanquishing inflation).
To be clear, there’s no reason to believe Summers — or any of the Fed’s many detractors — would be any better at the job. Indeed, many current Fed critics were themselves public officials at one time or another, responsible for either dictating monetary policy or shepherding fiscal policy. If memory serves, all of them, without exception, failed more than they succeeded, with the obligatory caveat that “failure” and “success,” like economics itself, are highly subjective in this context. Summers is the quintessential example.
The problem for Powell and his colleagues (and also for Yellen, given that, for most of us, she’s still synonymous with the Fed), isn’t that their guesswork turned out to be wrong. That’s part of the job. The problem is that they were wrong repeatedly, loudly and very publicly, about the only economic issue you can’t be spectacularly wrong about in public.
Economic debates are too esoteric for the general public to care about with one exception: Inflation. The public cares about unemployment, but it takes a pretty severe increase in the jobless rate for voters to consider the issue a national crisis. Joblessness is a dinner table issue when someone at that table has lost a job. Other than that, it’s someone else’s problem. The only modern exception to that came during the original pandemic lockdowns, when the unemployment rate briefly surged to levels consistent with Depression (with a capital “D”).
To be sure, elevated joblessness and shallow recessions can be politically ruinous, but nobody is going to storm the Eccles Building if the technocrats are off by six-tenths of a percentage point on their projections for next year’s unemployment rate.
Inflation is a different matter entirely, especially in a political environment where the GOP is keen to suggest that a sitting US president is somehow beholden to a faction of his party comprised of purported “leftist radicals” with designs on turning America into Venezuela. That’s obviously ridiculous, but tens of millions of voters believe it. When a few million more who didn’t believe it initially notice their grocery bills are rising at what, for a developed economy, counts as an alarmingly rapid rate, they might start to believe a watered down version of the narrative too, especially when gas prices are the highest they’ve ever been (in nominal terms, anyway).
Simply put, you can’t tell the public that inflation is “transitory” and repeat that line several hundred times for 18 straight months against a backdrop of ever higher consumer prices. If you do, everyone is going to notice, irrespective of whether their own financial circumstances are such that a 10% increase in grocery bills is irrelevant.
There’s no “target” for unemployment. There’s NAIRU, but to the average American, “NAIRU” is a Star Wars villain. Or the demonic antagonist from a superfluous Netflix horror series. By contrast, 2% inflation means 2%, even if the method for achieving it eventually fell victim to economists’ overriding affinity for acronyms (AIT). Inflation is nowhere near 2% (figure below). And everybody in America knows it.
This is (easily) one of the most serious credibility problems the Fed has ever faced. Some readers may scoff at that contention. What about their role in exacerbating inequality? Or killing price discovery? Or making a mockery of money itself by conjuring trillions out of thin air to perpetuate the increasingly ridiculous circular funding scheme we call “the Treasury market”? And what about the countless examples of what critics charge is the institution’s hand-in-glove relationship with Wall Street? And on and on.
But remember: Inherent in the concept of a credibility problem is a widespread loss of public confidence around an issue (or issues) the public cares about and understands intuitively. Inflation is such an issue. Debating the myriad other issues related to the Fed’s credibility requires engaging with concepts that can be a challenging lift for a society short on time, patience and attention. By contrast, inflation is profoundly easy to grasp. It’s also conducive to anger and Americans always want a scapegoat.
“A couple of years. I mean, the other thing that’s hard to measure is just people’s confidence. Right?” CBS’s Brennan asked, after Mester said inflation likely wouldn’t return to 2% anytime soon. “And when they look at being told by the administration, by the Fed, that inflation was ‘transitory,’ they can say people were wrong. Right?”
Mester meandered. Ukraine. Oil. Supply conditions. Other people who were wrong too.
“What I want to say, though, is we at the Fed are very committed to using the tools at our disposal to bring this inflation under control and getting it back to 2%,” she told Brennan, eventually. “It is the number one challenge in the economy now.”
“It is,” Brennan responded, flatly.