The fascinating thing about the reaction to last Friday’s economic reports–which triggered the Fed’s sudden 75-basis-point rate hike yesterday–is how many people still believe this inflation was not caused by the central bank, and therefore cannot be fixed by it. So let’s back up for a second. What if I told you the U.S. economy, which is typically lucky to…
--probably double what was actually sustainable. But few people even talk about that nominal number, because the standard is to use"real," or inflation-adjusted GDP, which only rose 5.7% last year. The confusion is growing with each passing quarter, becauseor actual growth remains very high by historical standards, but almost all of it is now going into higher prices. It's been a long time since this distinction mattered, but it is critical to understanding the economy right now.
In other words, we might be in a"real" recession, but not an actual one, because stimulus fueled a massive nominal demand boom that overwhelmed our true economic capacity. And a lot of people are getting this backwards, thinking the"weak economy" is now being sent into a recession by the Fed tightening too much. No, the Fed has been over-stimulating the economy, causing the inflation that's now eroding real growth.
And sure, you could say the White House and Congress are truly to blame, given the size of their fiscal stimulus. But politicians don't have a mandate to deliver"price stability"--the Fed does."You cannot blame fiscal policy, which is slow-moving and known well in advance," wrote MKM's Michael Darda earlier this year. The Fed knew the stance of fiscal policy, and had the tools to offset it .
So it's a little disingenuous for Fed Chair Powell to say, as he did in the press conference yesterday, that it's"increasingly clear many inflation drivers are beyond the Fed's control." Either the Fed believes that, which is problematic, or it knows it's culpable but is not quite taking full responsibility for it, which is equally so.
It would be easy to blame Putin for our stagflation, but if all we had were high energy and grain prices, that wouldn't explain how the economy could be soaring in size, especially last year, before the invasion happened. The clearest thing the Fed could now say is that it simply wants to slow nominal growth to the more sustainable 4% range, in order to bring inflation down, and if that means a slowdown in the labor market, so be it. All they're doing now is confusing people.
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