More On: Federal Reserve
The chances that the Fed will cause the next bust are going up
Congress and the Federal Reserve could be putting us on a path to a bad economy
Histories demonstrate that high inflation can persist for over a decade
The rate of inflation drops to 7.1%, but it still has a long way to go down
Wall Street wants to raise the target inflation rate above 2%. This is not a surprise
Bond markets may have taken a poor view of the left's aspirations to construct a European socialist state if the Federal Reserve had not bought up Treasury notes.
Despite the fact that inflation has hit a 30-year high of 6.2 percent—more than three times the Federal Reserve's objective of 2 percent—the central bank continues to create money and promises to do so for many months. Powell's casual "What, me worry?" attitude to "fighting" inflation has garnered increasing criticism from unexpected corners, yet Biden may re-appoint Powell as Fed chairman when his current term ends in February.
With progressive groups and lawmakers such as Massachusetts Senator Elizabeth Warren pushing for Biden to replace Powell, some Republican senators appear to be leaning toward supporting his re-election, arguing that any replacement Biden proposes would have a far more radical agenda on issues such as bank regulation. Conservatives who support Powell's re-confirmation risk "owning" the Fed's easy-money policies, as well as the inflationary spikes that have followed them.
Printing Money…
Inflation, according to Nobel Laureate economist Milton Friedman, is "always and everywhere a monetary phenomena." Because inflation occurs when too much money chases too few goods, any investigation of the present inflation rise must begin with the involvement of the Federal Reserve. Even now, about 20 months after COVID initially produced severe economic lockdowns and shocks in the United States, the Federal Reserve has maintained its foot on the monetary accelerator, creating money via "quantitative easing" to boost economic growth.
The Fed has been buying Treasury bonds and mortgage-backed securities at a rate of $120 billion per month since March 2020. The Fed kept driving its figurative automobile at 100 miles per hour, as a PBS "Frontline" series this summer shown, even after the acute shock to the economy from last spring's lockdowns had passed. However, by doing so, the Fed has inflated asset values in housing, equities, and other financial instruments, resulting in hazardous bubbles that might someday "pop"—with disastrous effects for the economy.
The Fed finally declared this month that it will take its foot off the monetary accelerator, if only slightly. It will gradually reduce its purchases by $15 billion each month, printing "just" $105 billion in November, $90 billion in December, and so on. Near that rate, the Fed would still pump $420 billion into the economy between now and the conclusion of its purchases in May—all while inflation remains at 30-year highs.
It's no surprise, then, that Sen. Joe Manchin, D-West Virginia, and Majority Leader Chuck Schumer, D-New York, agreed to move forward with a budget resolution paving the way for Democrats' multibillion-dollar spending bill only if the "Federal Reserve ends quantitative easing" in a document signed in July. Unfortunately, Manchin did not keep to his requirements, since if he had, the Fed would not have had to pump an extra $780 billion into the economy from August 1 through the conclusion of the Fed's money-printing program in May of next year.
… And Monetizing Federal Debt
And make no mistake: the Fed's activities in printing money don't only assist Democrats pass their big-spending program; they also help Democrats pass their big-spending agenda. Powell made his intentions for more "stimulus" clear in a speech last October, saying, "The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods until it is clearly out of the woods."To put it another way, Democrats should keep pushing their big-spending agenda, and Powell and the Fed will keep buying Treasury bonds to pay it. House Speaker Nancy Pelosi, unsurprisingly, responded to Powell's October 2020 address with a plea for additional "stimulus."
Some may have forgotten, but the $1.9 trillion package passed by Democrats in March still has $709.8 billion left to spend in the current fiscal year (which ends September 30) and beyond. Furthermore, the multibillion-dollar spending measure that Democrats are attempting to drive through Congress this year would almost certainly raise the deficit—and hence inflation—in the first few years, though we have yet to get a Congressional Budget Office score to determine the exact amount.
If the Federal Reserve had already stopped its quantitative easing programs, and begun raising interest rates, Democrats likely wouldn’t have spent this fall trying to ram through trillions of dollars in new entitlement spending. Without the Fed buying up much of the available Treasury notes, bond markets may have taken a very dim view of the left’s plans to create a European socialist state, and the bill could have collapsed before it got off the ground.
‘Fire Jay Powell!’
With Powell and the Federal Reserve effectively tinkering as inflation soars, more observers are calling for the country's central bank to take more aggressive action. Mohamed El-Arian, an influential economic researcher, stated on Monday that the Federal Reserve is "losing credibility" by not halting its money-printing operations sooner. Even Jason Furman, who chaired the White House’s Council of Economic Advisers in Barack Obama’s second term, called for faster action from the Fed to fight inflation in a Wall Street Journal op-ed:
The oversize and poorly designed $2.7 trillion fiscal stimulus passed in December and March is at least partly to blame for [higher inflation in the U.S. than in Europe]….The [Federal Reserve] should express a more realistic understanding of inflation and firm up monetary policy by tapering its asset purchases more quickly. The Fed should set the default expectation that the federal-funds [interest] rate will be on an upward path starting in the first half of 2022.
With experts like these blaming the Federal Reserve for a lackadaisical approach to inflation, Senate Republicans should avoid confusing their messaging on price rises by voting for the Fed's architect. Instead, they should make a strong case for Powell's replacement as chair—hopefully this spring, but no later than the 2024 presidential election.
