The Fed will hike another 25 basis points this week, and Powell will signal that's likely the last rate hike, and the Fed will not cut rates this year. Believe him.
Another wonderful read, but as I've said many times before, Volcker is no hero especially to the middle class for his damaging recession in the 80's in his war on inflation. As Warren mosler has said, rate hikes are regressive stimulus to bondholders its a terrible way to fight inflation.
We could use better fiscal policy out of DC but we all know that isn't happening. But ultimately I agree, it will be another 25 point hike then afterwards, a pause.
Thanks Claudia. You’re of course correct. Basically, history dictates the Fed lacks proper authority and tools to mitigate inflation without hurting Americans. Many macroeconomists I follow Stephanie Kelton, Warren Moselor, Dirk Ehnts, and the like point to the OPEC oil embargo as the “main” cause for the “70s” inflation and Volker as ineffective as his actions caused double dip recession and the main historical incident to get us out occurred due to the Iran /Iraq War reversal impacts on oil production. We hoped for a pause for the past two months. June works and I agree time should produce more strong economy indicators but not move a conservative Fed to cut rates. Now if we could get the marketeers to resist price gauging and pass it off as inflation. Sadly, “the market” consists of fearful people who subscribe to hyper capitalism and individualism as history shows.
I remain optimistic. MMT has proved successful throughout the pandemic despite the nihilism of the right. The economy needs Fiscal policy to resource effectively and assess to tweak implementation. The Fed should work to do no harm.
Sold me on Bernanke's book. I'm not a fan of reading books that I am a 100% agreement, they seem thin to me. Some disagreements are good - going to make me think,.
II appreciate it as a lens to 'mainstream' macro and Fed orthodoxy. Bernanke is a scholar of history more than most economists, an excellent writer, and was there firsthand. Of course, that last one colors his view (as it would anyone). Still, it's instructive (and concise too).
And while Burns may be the worst Chairman in being subservient to Nixon's re-election desires, the economic losses from his inflation were magnitudes less than the decade of Bernanke-Yellen allowing inflation and inflation expectations to be UNDER the Fed's own target.
Great job of referencing both the data and psychological driven aspects of the Feds action regarding rates. But kind of scary nonetheless because neither is bankable (pun intended).
As an aside, I was flummoxed when I read the GOP is proposing a debt funding bill with work requirements for Medicaid and Food Stamps recipients at the same time the Fed is working hard to drive unemployment up to tame inflation. I know monetary and fiscal policies are 2 different things, but gosh what a disconnect.
I appreciate your analysis. But the Fed should consider when they hold interest rates at say 5.25%-5.5%, this is quite restrictive in financial conditions and can cause more harm to the system especially in terms of borrowing costs for corporates. Thank you!
It looks like they might be holding at 5% for a while. And I agree with you. But borrowing costs / credit supply of small businesses (especially with the regional bank turmoil) and consumers will rise too.
Indeed the continued banking crisis can only raise further lending standards and borrowing costs. I think that was why many / market believe the Fed should have paused or should cut earlier - there is a long and variable lag from monetary policy changes!
Always enjoy your substack and recommendation for others writers. I do wonder what Arthur Burns' personal experiences were which influenced his decision(s). I suspect the depression did, and like today's fed who want to avoid persistent inflation, Burns likely wanted to avoid another depression. Burns was successful if that was his goal.
I believe he believes it. But he doesn't have a crystal ball either. In Sept 2008, the Fed held the Fed funds rate steady after Lehman collapsed, but ended up cutting by 175+ bps within 3 months. And they increased IOR from 0 to 25bps in Oct 2008. For years, the next increase was just around the corner. In Dec 2015, they did an increase that was supposed to be the first of 4, but then they had to listen to the economy again and not do them in 2016. They should stop pretending to know the future and give better guidance as to what conditions will lead to what changes in rates.
I believe you are correct in your prediction of Powell's likely behaviour. More's the pity -- the hagiographies of Volcker are revolting for anyone who cares about the well-being of working people in America -- he kept a note in his wallet reminding himself to crush labour. The sooner he is consigned to the dustbin of history, the better.
Using rates to control inflation requires that they get high enough to cause unemployment. Like amputating your toes instead of buying bigger shoes... your shoes end up fitting, but it is a painful, bloody mess.
Interesting post. I might be a little spacey but I always liked the movie Being There which took place during Burns time and the recession and problems back then . We thought we were beyond the business cycle. If you haven't seen the movie it is an economic and cinematic masterpiece IMO. Also John Blair wrote the definitive work on the energy crisis according to the NYTimes 'The Control of Oil" where he called the relationship between OPEC and Big Oil a Bilateral Symbiotic Oligopoly . Putin now wears two hats and is part go the oligopoly . Big Oil unlike other industry has no problem with OPEC plus oil price hikes since they can pass them on to consumers and increase profits. There is also more economic concentration now then in Burns' time.
I continue to believe that the US consumer can tolerate a 3% inflation rate as long as employment stays healthy. Why will employment stay healthy? Because of the great retirement boom which reduced the workforce by almost 2% and because new gig economy jobs are likely undercounting real employment.
Other reasons for higher inflation? More onshoring, nearshoring of manufacturing encouraged by the US's IRA incentives.
I agree the next year or two could go in many directions. My baseline (50%+) was a soft-ish landing up until Silicon Valley Bank failed. I don't think we are in a strong enough place to withstand a credit crunch, especially when the Fed won't back off.
Your last 2 sentences... "And I do not expect them to blink in financial market turmoil. And that worries me." why does that worry you? I know this is about what you think the Fed will do, not "should" do... but... this indicates that there is something you've left out.
My baseline (50%+ chance) is for a recession, and I see a credit crunch as increasingly likely. A Fed that 'only has eyes' for inflation would a big problem.
Interesting. There is an argument that this spike in inflation is being driven by savings and wages and not necessarily reliance on credit. Perhaps there are fiscal levers that could be pulled? I’m not optimistic though.
Another wonderful read, but as I've said many times before, Volcker is no hero especially to the middle class for his damaging recession in the 80's in his war on inflation. As Warren mosler has said, rate hikes are regressive stimulus to bondholders its a terrible way to fight inflation.
We could use better fiscal policy out of DC but we all know that isn't happening. But ultimately I agree, it will be another 25 point hike then afterwards, a pause.
100000%
Thanks Claudia. You’re of course correct. Basically, history dictates the Fed lacks proper authority and tools to mitigate inflation without hurting Americans. Many macroeconomists I follow Stephanie Kelton, Warren Moselor, Dirk Ehnts, and the like point to the OPEC oil embargo as the “main” cause for the “70s” inflation and Volker as ineffective as his actions caused double dip recession and the main historical incident to get us out occurred due to the Iran /Iraq War reversal impacts on oil production. We hoped for a pause for the past two months. June works and I agree time should produce more strong economy indicators but not move a conservative Fed to cut rates. Now if we could get the marketeers to resist price gauging and pass it off as inflation. Sadly, “the market” consists of fearful people who subscribe to hyper capitalism and individualism as history shows.
I remain optimistic. MMT has proved successful throughout the pandemic despite the nihilism of the right. The economy needs Fiscal policy to resource effectively and assess to tweak implementation. The Fed should work to do no harm.
It has the tools, but it has not managed them skillfully enough and with enough patience to fulfill its dual mandate.
Sold me on Bernanke's book. I'm not a fan of reading books that I am a 100% agreement, they seem thin to me. Some disagreements are good - going to make me think,.
II appreciate it as a lens to 'mainstream' macro and Fed orthodoxy. Bernanke is a scholar of history more than most economists, an excellent writer, and was there firsthand. Of course, that last one colors his view (as it would anyone). Still, it's instructive (and concise too).
You should consider writing about disagreements that make you think.
I sure hope you are wrong about the Fed.
And while Burns may be the worst Chairman in being subservient to Nixon's re-election desires, the economic losses from his inflation were magnitudes less than the decade of Bernanke-Yellen allowing inflation and inflation expectations to be UNDER the Fed's own target.
This sounds like the traditional "It Could of Been Worse" argument to justify inappropriate responses.
In other words, a mere distraction. It can always be worse.
Great job of referencing both the data and psychological driven aspects of the Feds action regarding rates. But kind of scary nonetheless because neither is bankable (pun intended).
As an aside, I was flummoxed when I read the GOP is proposing a debt funding bill with work requirements for Medicaid and Food Stamps recipients at the same time the Fed is working hard to drive unemployment up to tame inflation. I know monetary and fiscal policies are 2 different things, but gosh what a disconnect.
Check me on this. Am I wrong?
You are correct. Sadly.
I appreciate your analysis. But the Fed should consider when they hold interest rates at say 5.25%-5.5%, this is quite restrictive in financial conditions and can cause more harm to the system especially in terms of borrowing costs for corporates. Thank you!
It looks like they might be holding at 5% for a while. And I agree with you. But borrowing costs / credit supply of small businesses (especially with the regional bank turmoil) and consumers will rise too.
Indeed the continued banking crisis can only raise further lending standards and borrowing costs. I think that was why many / market believe the Fed should have paused or should cut earlier - there is a long and variable lag from monetary policy changes!
Moneyed Interests don't care much about what others think the Fed should do.
Always enjoy your substack and recommendation for others writers. I do wonder what Arthur Burns' personal experiences were which influenced his decision(s). I suspect the depression did, and like today's fed who want to avoid persistent inflation, Burns likely wanted to avoid another depression. Burns was successful if that was his goal.
That's an interesting question. I have not read any biographies of him. I will ask around.
Good take, I agree.
I believe he believes it. But he doesn't have a crystal ball either. In Sept 2008, the Fed held the Fed funds rate steady after Lehman collapsed, but ended up cutting by 175+ bps within 3 months. And they increased IOR from 0 to 25bps in Oct 2008. For years, the next increase was just around the corner. In Dec 2015, they did an increase that was supposed to be the first of 4, but then they had to listen to the economy again and not do them in 2016. They should stop pretending to know the future and give better guidance as to what conditions will lead to what changes in rates.
The Fed's Balance sheet was about $1 Trillion in 2008, and currently just under $9 trillion.
Who benefitted from this?
This was an insightful read. Thanks for sharing your knowledge
I believe you are correct in your prediction of Powell's likely behaviour. More's the pity -- the hagiographies of Volcker are revolting for anyone who cares about the well-being of working people in America -- he kept a note in his wallet reminding himself to crush labour. The sooner he is consigned to the dustbin of history, the better.
Bingo! Its not as complicated as its being made out to be.
Using rates to control inflation requires that they get high enough to cause unemployment. Like amputating your toes instead of buying bigger shoes... your shoes end up fitting, but it is a painful, bloody mess.
What happens if Congress goes off a cliff with the debt ceiling? It seems pretty likely something bad is going to happen with the markets.
Very bad. I will write more on the topic and have already been doing a fair bit of press on it.
Checkout social media/podcasts about economic forecasts by Ray Dalio and Peter Schiff.
I totally disagree with their politics, but their economic analysis is compelling regarding records amount of debt.
Interesting post. I might be a little spacey but I always liked the movie Being There which took place during Burns time and the recession and problems back then . We thought we were beyond the business cycle. If you haven't seen the movie it is an economic and cinematic masterpiece IMO. Also John Blair wrote the definitive work on the energy crisis according to the NYTimes 'The Control of Oil" where he called the relationship between OPEC and Big Oil a Bilateral Symbiotic Oligopoly . Putin now wears two hats and is part go the oligopoly . Big Oil unlike other industry has no problem with OPEC plus oil price hikes since they can pass them on to consumers and increase profits. There is also more economic concentration now then in Burns' time.
Thanks, I will check both out.
Are there any developed countries that don't have Oligopolies?
I continue to believe that the US consumer can tolerate a 3% inflation rate as long as employment stays healthy. Why will employment stay healthy? Because of the great retirement boom which reduced the workforce by almost 2% and because new gig economy jobs are likely undercounting real employment.
Other reasons for higher inflation? More onshoring, nearshoring of manufacturing encouraged by the US's IRA incentives.
I agree the next year or two could go in many directions. My baseline (50%+) was a soft-ish landing up until Silicon Valley Bank failed. I don't think we are in a strong enough place to withstand a credit crunch, especially when the Fed won't back off.
Sounds like a Fox News fan.
This is a great take. Well written.
Your last 2 sentences... "And I do not expect them to blink in financial market turmoil. And that worries me." why does that worry you? I know this is about what you think the Fed will do, not "should" do... but... this indicates that there is something you've left out.
My baseline (50%+ chance) is for a recession, and I see a credit crunch as increasingly likely. A Fed that 'only has eyes' for inflation would a big problem.
Interesting. There is an argument that this spike in inflation is being driven by savings and wages and not necessarily reliance on credit. Perhaps there are fiscal levers that could be pulled? I’m not optimistic though.