This Bloomberg story is pretty discouraging:
The Fed needs to slow an economy that is “clearly overheated” as it comes out of the pandemic, said Krugman, a City University of New York professor.
Inflation — which is already at a 40-year high and more than three times the Fed’s 2% target — looks set to accelerate again as supply disruptions from the Ukraine war boost food and energy prices. The labor market is, in the words of Powell, “extremely tight,” with 1.7-plus job openings for every unemployed person.
To try to take the edge off demand, the Fed intends to raise interest rates “expeditiously” to more normal levels and is prepared to push them into “restrictive” territory if necessary to achieve price stability, Powell told a conference of economists on March 21.
Paul Krugman is not normally viewed as a hawk, and even he believes that policy is too expansionary. But what really caught my eye is the term “intends”. Instead of intending to do something about the problem, why isn’t the Fed doing something right now? Indeed why haven’t they been tightening since it became clear the economy was overheating?
The quarter point rise in the Fed’s target rate at the last meeting didn’t even keep up with the rise in the equilibrium rate of interest. Money is getting easier. And why has Powell stopped talking about maintaining an average inflation rate of 2%? What happened to that big new policy initiative?
Milton Friedman and Anna Schwartz wrote a very long history of monetary policy in the US. Allan Meltzer wrote a very long history of the Federal Reserve. Want a Cliff’s Notes version of the two books? How’s this for a summary:
Once again, the Fed was behind the curve.
The whole purpose of FAIT was to prevent this sort of major overshoot. It’s a pity they abandoned the policy.
PS. Michael Darda directed me to a SF Fed study that suggests the current high inflation is due to . . . you guessed it . . . fiscal policy. No mention of monetary offset.
And so we’ve come full circle and are right back in the intellectual milieu of the late 1960s.
Milton Friedman is rolling over in his grave.