Fed Up

Jim Bullard wants to “nip inflation in the bud before it gets entrenched in the economy.”

A good start would’ve been ending QE around this time last year and commencing rate hikes at the September 2021 meeting. Water under the bridge, I suppose.

Instead, the Committee is engaged in a frantic effort to avoid being remembered for what, in retrospect, appears as a recklessly bizarre policy bent (figure below).

As inflation accelerated, rates were left loitering at the lower-bound and the Fed binged on trillions in bonds. Correlation isn’t causation, and I’ve certainly done my part when it comes to acknowledging Jerome Powell’s exceedingly onerous plight, but at the end of the day, the optics aren’t great.

Bullard, speaking at an event in Zurich, emphasized that he and his colleagues “have to act forthrightly and aggressively to get inflation turned around and get it under control.”

As for what happens if they don’t, Bullard said the US “could suffer a decade of high and variable inflation” which would “mess up price signals in the economy.” “We don’t want to get into that situation,” he emphasized.

Bullard was among the most vocally hawkish Fed officials prior to the Committee’s dramatic pivot earlier this year. On Friday, he said it’s too early to talk about US recession probabilities.

Elizabeth Warren probably doesn’t agree on that latter point. On Thursday, during a characteristically animated cameo on CNN, Warren said the Fed’s tools to fight inflation will make people poor. It was a reiteration of an exchange with Powell from a day earlier.

During this week’s Senate hearing, Warren asked Powell if rate hikes would bring down gas prices. “I would not think so,” he said. Then she asked if Fed hikes are likely to bring down grocery bills. “I wouldn’t say so, no,” Powell said. At that point, she stopped asking and starting telling. “Rate hikes won’t make Vladimir Putin turn his tanks around and leave Ukraine,” she scolded. “Inflation is like an illness and the medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse,” she told Powell. “Right now, the Fed has no control over the main drivers of rising prices.”

Read more: Jerome Powell, Professional Fall Guy

Warren is, of course, exactly right. She usually is. But her trademark caustic demeanor long ago crossed the threshold from earnestness to shtick, a metamorphosis I’ve lamented repeatedly. Warren is becoming a caricature of herself, and it’s not constructive. Debating her is mostly impossible. Jamie Dimon can do it. Nobody else can. When it comes to Powell (who Warren famously called “a dangerous man”) and the Fed more generally, the problem is straightforward. They don’t have the tools they need to address every kind of inflation. If Congress doesn’t intend to let the Fed use the tools it does have to meet its price stability mandate even if that means painful tradeoffs, then Congress needs to soften the Fed’s mandate.

Like Warren, Bill Ackman worries Americans will be poor because of the Fed, only for different reasons. “Powell does not come across as someone who wants to go to battle against inflation. He seems uncomfortable and reluctant, almost apologetic, about raising rates,” Ackman said, in another lengthy social media screed.

Ackman’s contention was that Powell’s communications style belies the Fed’s seriousness in the inflation fight — that his demeanor is part of the reason front-end yields are lower and market pricing now less aggressive. “Powell and the governors care about the American people, our economy and their legacy,” he went on to say, suggesting that the funds rate could be 5% in 2023. By contrast, markets were pricing Fed cuts next year when Ackman regaled his social media followers. For what it’s worth, no indicator or analyst that I’m aware of suggests a 5% terminal rate is “in the cards,” as Ackman put it.

He closed on a somewhat abrasive note. “The Fed clearly has a credibility problem as the bond market flat out ignores Powell’s commentary,” Ackman wrote. Apparently he too thinks Powell might be a “dangerous man,” albeit one who “cares” about the public.

Ultimately, the Powell Fed, having missed the opportunity to “nip inflation in the bud,” to employ Bullard’s language, finds itself in a no-win situation. As Warren correctly pointed out, the Fed’s tools won’t directly impact key categories where inflation is hurting consumers the most. But, Ackman is equally correct to suggest the Fed can’t chance being seen as completely helpless — that could feed into longer-term inflation expectations, risking a self-fulfilling prophecy.

One way or another, I fear everyday Americans are indeed going to find themselves poor, or at least poorer. If inflation doesn’t get Main Street, a recession aimed at addressing it will. As one GOP senator helpfully reminded Powell this week, “Clearly you’re aware that you’re going to be the person [who] takes the fall.” The senator, Mike Rounds, was referring to a scenario where inflation doesn’t abate, but as Warren’s remarks made clear, Powell will be the guy who gets the blame for any deceleration in the economy too. It’s a maddeningly recursive situation: Fight inflation and get blamed for the recession or don’t fight inflation and get blamed for high prices.

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8 thoughts on “Fed Up

  1. H-Man, I have to say Warren can be abrasive. When she was running for president, I read her healthcare plan and thought it made a lot of sense especially on how it would be funded. But her questioning (really interrogating) leaves something to be desired.

    Meanwhile, JP appears to be trying to do something for everyone which in light of the task he is dealing with is an impossible chore. Right now it looks very ugly and there is going to be collateral damage. He should just accept it and put the peddle to the metal. As my mother use to say when she took out the dreaded iodine bottle to assuage my numerous cuts from battling with my brothers as a child, “It will hurt but it is good for you”.

  2. J Pow should be the one taking the fall, the Fed failed on every level and now they find themselves backed in a corner, with no good options. Too bad the lower income earners will again bear the brunt of the upcoming economic slowdown

    1. The problem with this contention, though, is that it’s by no means clear that inflation would be materially lower right now if the Fed had commenced hikes last year and stopped QE last summer. I said that would’ve been “a good start,” but I meant that more from a “at least we could say we tried” perspective. It’s very difficult to imagine that headline inflation would be substantially lower today assuming Fed tightening last year but assuming no change in the macro circumstances.

    2. The fed would at least be able say we did our job. Now, when things will get worse regardless, officials are eyeing an easy scapegoat who can only say we will try to do our job when being blamed.
      The politicians, EW and JP, aren’t helping.

  3. Congress had a role in creating this inflation dilemma. In fact, when we’re talking about general economy price inflation (as distinguished from asset price inflation), its not clear that Congress’ role wasn’t as large as the Fed’s. That’s on Warren and the other Senators.

    Congress could, even now, step in to protect the lowest income from the collateral damage they will suffer from the Fed’s blunt tools. If it won’t, that’s on Warren and the other Senators.

  4. Hindsight is 20/20. I thought the Fed should have ended Q/E sooner when liquidity came back into the markets in 2021, as that was part of its mission and they largely accomplished that goal in 2021.It would have given them optionality going into 2022. Rate hikes until the end 2021, in my mind clearly fall into the category of hindsight capital management. Nobody could have predicted the war in Ukraine- at least until perhaps Dec/January of the recent past. I am far from a hawk, but the US and the allies clearly could have done more to deter Russia going into Ukraine. A well timed joint military exercise in the Black Sea and on land with NATO would have been a good call. Putin is a bully, and a nut but he knows when he is outgunned. His nuclear bluff only came out later in desperation. I am not in favor of political hit jobs or anything- but I might make an exception for Putin. If he is not stopped now, he will go after Maldova, the Baltics, and elsewhere in the former Soviet empire. We should be reviving the nuclear deal with Iran – because that makes sense for us and them- not to mention unleash quite a bit of oil and maybe even gas. And I also think it will be a mistake to force Ukraine to do anything regarding lost territory. Russia should be forced to pay for rebuilding what they have done to that country.

  5. Bullard said the US “could suffer a decade of high and variable inflation” which would “mess up price signals in the economy.” “We don’t want to get into that situation,” he emphasized.

    Um, pretty sure we are already suffering the of messing up price signals Jim. Priceless.

    1. “We don’t want to get into a situation where something other than our policies is distorting price signals.”

      Miller’s Crossing: “Now if you can’t trust a fix, what can you trust? For a good return, you gotta go bettin’ on chance. And then, you’re back in anarchy. Right back in the jungle.”

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