Buckle Up for a Crashing Economy and More Inflation
Jerome Powell began hinting that inflation might be a problem last August. In November, Powell retired the word “transitory.” But here we are in May and the Federal Reserve still hasn’t done anything substantive to address the inflation problem.
And now it may be too late. It’s probably time to buckle up for more inflation – and perhaps a crashing economy.
Powell and Company have been talking tough for months, but there hasn’t been a whole lot of action. In March, the central bank raised interest rates a paltry 25 basis points. At the May meeting, the FOMC followed up with a more aggressive 1/2% rate hike but took a 75 basis point rate hike off the table.
Meanwhile, the Fed didn’t even start tapering quantitative easing until January. In mid-April, the balance sheet was still expanding, hitting an all-time high of $8.97 trillion.
At the May FOMC meeting, the Fed unveiled its balance sheet reduction scheme. It was hardly impressive. If the Fed shrinks its balance sheet at the proposed rate, it will be back to pre-pandemic levels in about eight years.
The Fed has targeted a 2.5% interest rate by the end of the year. With GDP already going negative in Q1, it’s questionable that the Fed can get there without completely tanking the economy. There are already signs that the Fed has pricked the housing bubble.
And as Mises Institute senior editor Ryan McMaken pointed out in a recent article, the Fed really needs to push rates much higher than 3%.
One percent may seem high to some market observers of recent rate cycles, but we’re now in a high-inflation environment with price inflation above 8 percent. The Fed is going to have to do more than a mild hike here and there to make a dent in 8 percent CPI (Consumer Price Index) inflation…
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