The Federal Reserve is set to launch its war on inflation. But it looks like it’s carrying a pea-shooter to a gunfight.
Or as Peter Schiff put it, a dove can’t change its feathers.
The final FOMC meeting of the year wrapped up with rates still set at zero. But the Fed announced it will speed up tapering its asset purchase program. It will double the pace of the taper with the central bank buying $60 billion in bonds beginning in January. That would be down from $120 billion a month in bond purchases at the quantitative easing peak. At that pace, the taper should be complete by March 2022.
Once the Fed wraps up its asset purchase program, it will begin raising interest rates. The FOMC released a new “dot-plot” projecting three rates hikes of 25 basis points next year, three in 2023 and two more in 2024. That would push rates to around 2%.
The Fed bankers expressed concern about sizzling hot inflation. There was no mention of the word “transitory.” But the committee members continue to skirt their own responsibility for rising prices, instead, blaming them on pandemic-related issues.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to elevated levels of inflation,” the FOMC statement said.
During his post-meeting press conference, Powell said he expects inflation to begin coming down toward the back-end of next year, but conceded that’s not a certainty.
“We can’t act as though that’s a certainty, and we’re not going to act as though that’s a certainty. There’s a real risk now, we believe, I believe, that inflation may be more persistent, and that may be putting inflation expectations under pressure, and that the risk of higher inflation becoming entrenched has increased. It’s certainly increased.”
So, what is the Fed going to do about it? It appears, not much.
These moves by the Fed amount to little more than spitting into the wind when it comes to taking on inflation. As Mike Maharrey wrote after the November data came out showing the Producer Price Index rose at the fastest rate ever, this is a runaway inflation freight train that the Fed won’t stop.
In order to truly take on inflation, the central bank needs to push interest rates at least as high as the inflation rate. Even using the government’s cooked CPI numbers that understate inflation, that would mean taking rates to at least 7%.
The plan is to push them to 2% — in three years.
You can do the math.
The Fed also needs to shrink the money supply. It does this by shrinking its balance sheet. The central bank isn’t even talking about this, at least not publicly. When asked about actually shrinking the $8.7 trillion balance sheet, chairman Jerome Powell set a cautious tone saying it’s “best to take a careful, methodical approach,” noting that “markets can be sensitive” about it.
There has been a lot of anticipation of the Fed moving against inflation. But in his podcast, Peter pointed out that if the central bank was really serious about fighting inflation, it would have started the war long ago.
“If the Fed was ever going to get serious, they would have already done so. The evidence was overwhelming that we had an inflation problem a year or two ago, and the Fed did nothing.”
Instead, the Fed made an all-or-nothing bet on “transitory.”
First Jerome Powell denied there was any inflation on the horizon. Then he pivoted to “don’t worry, it’s just transitory.” Now, he’s finally admitted that it’s not transitory. But the policy moves announced by the Fed will prove feckless in the face of this inflation wave.
Peter raised an important question.
‘The Fed has gotten everything wrong when it comes to inflation. So, why does the market still believe the Fed is going to get it right when it comes to fighting inflation? It’s going to be just as wrong in its fight against inflation as it was in its forecast regarding inflation.”
Peter said that if the Fed was really serious about fighting inflation, it would just end quantitative easing immediately instead of tapering it over time.
“If you’ve got a fire, just stop pouring gasoline on it. Don’t just gradually pour on less. Just stop.”
In practice, the Fed is barely altering the “tightening” policy it announced when inflation was still supposedly just “transitory.” It’s going to wrap up the taper 2 months earlier and raise rates a little quicker.
“Now, all of a sudden, inflation is a problem, yet we have the same approach? We’re still going to taper QE instead of going cold turkey? And we’re still going to have these quarter-point rate hikes, maybe just one extra rate hike in 2022? How is that going to do anything about the severity of the inflation problem we have right now? It’s not.”
When you really step back and look at Powell’s posture coming out of this FOMC meeting, you got the same old dove.
“Although this dove is still talking about fighting inflation. But if you actually listen to what he’s saying, what is his battle plan for this war against inflation — again, it’s pretty much the same battle plan he had when there was no inflation. So, how can this be serious?”
Listen to Peter’s podcast for more analysis of the Fed meeting, along with the November retail sales numbers, the debt ceiling hike and how history will judge Jerome Powell.