G. William Miller was appointed Fed chair in March 1978, at a time when 12-month CPI inflation was running at 6.4%. He was “promoted” to Treasury Secretary (basically fired) in August 1979, at a time when inflation was 11.8%. He was such a incompetent Fed chair that the rest of the FOMC actually voted to raise rates in 1979 over his opposition.

Of course Powell is nowhere near that ineffective. At least not yet. TIPS spreads are still below 3%.

But the signs are worrisome. The Fed continues to set its target rate at zero and engage in QE even as PCE inflation is running at roughly 6% and NGDP growth is over 11% because . . . well no one seems to have any idea why they are doing this. Do you?

And that’s not even the Fed’s biggest mistake. The Fed’s biggest error is a failure to credibly communicate a commitment to its new average inflation targeting regime. Indeed, last month Powell seemed to repudiate the whole idea behind AIT, which is that a period of above target inflation should be followed by a period of below target inflation. In my view, we are teetering on the edge of a cliff, where the Fed will rapidly lose credibility if it does not make a dramatic shift in policy toward tighter money.

What should the Fed do? By far the most effective step would be a renewed commitment to insure that PCE inflation averages 2% over time. I suggest they make that commitment more specific by indicating an intention for PCE inflation to average 2% during the 2020s. Of course that sort of specificity should have been there from the beginning—if it had been then we probably wouldn’t be in this mess.

As to policy instrument settings, that completely depends on the economy. Because the Fed is so far behind the curve, they’ll have to raise rates by far more than if they had acted a few months sooner. My fear is that the Fed will try to do something “dramatic”, and they’ll actually do far too little. And then (just as in the 1970s) people will say, “See, monetary policy cannot control inflation”. At least until Volcker was appointed.

PS. In 2020, a big theme in this blog’s comment section was that AIT had failed because TIPS spreads were too low. In 2021, a big theme was that we didn’t need experts like Bernanke and Yellen because Powell was doing so much better. Beware of hasty judgments, including this post.

PPS. Tim Duy has been ahead of most people in spotting the Fed’s loss of credibility:

Yup, the biggest risk of recession now comes from a dovish policy. I’ve made this point before, but after the 2010s people seem to have forgotten the lessons of the 1970s.

Why does the Fed ALWAYS have to be behind the curve? Why can’t they let the market set the policy instruments at a level expected to produce success?

Unfairly.

Here’s Emily Peck in Axios:

A handful of prominent male economists, including former Treasury Secretary Larry Summers, are freaking out — mostly on Twitter — about a weekend New York Times profile of economist Stephanie Kelton, known for her work on Modern Monetary Theory, or MMT. . . .

And the gender dynamics — male economists piling on against a female economist and a female journalist, Times’ reporter Jeanna Smialek, in ways distinctive from typical academic arguments — look terrible here. . . .

What they’re saying: “I am sorry to see the @nytimes taking MMT seriously as an intellectual movement. It is the equivalent of publicizing fad diets, quack cancer cures or creationist theories,” Summers tweeted.

Noah Smith, a well-known economist and former Bloomberg columnist, wrote a Substack post calling the article “bad.”

The NYT article was bad, as are many of their articles on macroeconomics. The same snobbish establishment paper that criticizes all of the junk science on Covid and climate change reported in the conservative media is quite willing to give credence to junk science in economics.

As for Noah Smith, all I can say is that I know how he feels.

I am currently working on an article for The Hill, discussing all of the reasons why monetary policy became too expansionary in late 2021. One reason I cite is the Fed’s reluctance to move fast. They’ve seen evidence of overheating for several months, but fear another “taper tantrum” if they move too quickly to tighten policy.

In fact, the 2013 taper tantrum is widely misunderstood. The problem was not that the Fed tightened policy unexpectedly, it’s that the Fed tightened policy inappropriately, at a time when unemployment was 7.5%. The markets don’t fear unstable policy instruments, they fear bad macroeconomic outcomes.

Today, a tightening of policy is overdue. A new article in the Financial Times discusses how things are very different from back in 2013. Here’s the headline:

Bond market signals room for Fed to raise rates without stalling economy

This paragraph is the key:

The rising yields, coupled with steady inflation expectations, have pushed returns bond investors can expect to earn after inflation is taken into account sharply higher since the end of last year. Analysts say this increase in so-called real yields indicates traders are expecting the US economy to continue expanding in the years to come even as policymakers withdraw stimulus measures to slow intense price growth.

I am less optimistic than the FT about inflation, but that’s mostly because I don’t view 2.5% inflation over the next 5 years as good news.

1. I visited Miami last month. This FT piece on the city is excellent:

The new president of the United States Conference of Mayors, Suarez, who was re-elected mayor of Miami last year with 79 per cent of the vote, is a Republican. But he’s a Republican who is anti-Trump and disliked by Governor DeSantis, a man who lacks any of Suarez’s smoothness. The whiteboard in the mayor’s offices lists priorities including “upfund the police” and “anti-woke/freedom”.

2. Tucker Carlson is supporting Russia, and it’s influencing the GOP base (but not the Congressional leadership):

Carlson has even defended Moscow’s buildup of troops along the border with Ukraine — and President Vladimir Putin’s rationale for it — in a stark departure from the tough-on-Russia posture that has defined the Republican Party since the start of the Cold War. Meanwhile, Ukraine remains under active threat from an invasion that some are warning could be just the first domino to fall in Eastern Europe.

“I don’t agree with those views,” Florida Sen. Marco Rubio, the top Republican on the Senate Intelligence Committee, said when asked about Carlson’s monologues. “[It’s] the U.S. interest not just in Europe but around the world in not having countries decide, ‘That belongs to us, we’re going to go ahead and take it.’”

Some GOP senators rolled their eyes when asked about Carlson’s attacks and indicated that the far-right Fox host isn’t impacting their calculus on an emerging legislative path, even as his views are picking up steam among the base.

3. Just when you think the GOP cannot get any further down into the gutter, with get this:

WHEREAS , Representatives Cheney and Kinzinger are participating in a Democrat-led
persecution of ordinary citizens engaged in legitimate political discourse, and they are both
utilizing their past professed political affiliation to mask Democrat abuse of prosecutorial power
for partisan purposes, therefore, be it

RESOLVED, That the Republican National Committee hereby formally censures Representatives
Liz Cheney of Wyoming and Adam Kinzinger of Illinois and shall immediately cease any and all
support of them as members of the Republican Party for their behavior which has been
destructive to the institution of the U.S. House ofRepresentatives, the Republican Party and our
republic, and is inconsistent with the position of the Conference.

That’s right the Capitol Hill rioters trying to overturn the election were engaging in “legitimate political discourse” while Liz Cheney’s statements are illegitimate and she must be cancelled.

People point to nutty things said by individual Democrats like AOL, but this is an official resolution of the Republican National Committee. We are now seeing some members of the GOP embracing people like Vladimir Putin and Viktor Orban. What’s next? Xi Jinping?

4. Things are a bit different in the UK (the FT):

Contrast two leaders. Donald Trump’s approval ratings barely budged during his presidency, and his supporters dismissed every scandal as “fake news”. But when Boris Johnson turned out to have doubled as a party host during lockdown, his supporters fled: his net favourability rating went from +29 per cent in April 2020 to -52 per cent last week, according to pollsters YouGov. . . .

Today the US remains dangerously polarised — more like Turkey or India than western Europe. Among Republicans in particular, ethnic, religious and ideological identities are often perfectly aligned. Many believe God supports their party. Egged on by Trump, they fear their tribe is under existential threat.

And you guys laughed when I suggested we were becoming a banana republic.

5. Some in Britain think Trump is in trouble (from The Guardian):

It included a rebuke from the supreme court over documents related to the 6 January insurrection which Trump incited; news that the congressional committee investigating the riot was closing in on Trump’s inner circle; evidence from New York’s attorney general of alleged tax fraud; and, perhaps most damaging of all, a request from a Georgia prosecutor for a grand jury in her investigation of Trump’s attempt to overturn the 2020 election.

The week ended with the leaking of a document showing that Trump at least pondered harnessing the military in his attempts to overturn Joe Biden’s victory. . . .

“He’s Teflon Don, he said he could shoot somebody on Fifth Avenue and survive it, his supporters are going to support him no matter what, but I’m starting to think more and more that the walls are closing in on this guy,” said Kimberly Wehle, a respected legal analyst and professor of law at the University of Baltimore.

But this isn’t Britain, it’s the US. Trump is not in any trouble at all. He’ll skate right by all of this.

6. The butterfly effect:

The National Butterfly Center in Mission, Texas, closed indefinitely on Wednesday after years of wild QAnon conspiracy theories and mounting threats of violence, including a physical altercation last week with a Republican congressional candidate from Virginia demanding “to see all the illegals crossing on the raft,” The Texas Tribune reports. . . .

Right-wing conspiracists have been falsely claiming the National Butterfly Center is involved in sex trafficking and other crimes since 2019, and executive director Marianna Treviño-Wright has been getting threats. . . .

Jeffrey Glassberg, founder of the butterfly sanctuary’s parent organization, the North American Butterfly Association, told the Tribune “it’s incredibly distressing that the United States has come to the point where a really significant part of the public is just no longer tethered to reality.”

A “significant part”? I’d say if you add the Trumpistas and the woke supporters of cancel culture it might be “most”.

7. So, does Trump think Kamala Harris has the right to overturn the 2024 election?

8. In the week before the 2016 election, the big issue in the NYT was Hillary Clinton deleting emails. Which makes this especially ironic.

9. The wisdom of George Will:

If the personal is political, everything is politics. And that’s the definition of totalitarianism.

A mistake people commonly make about totalitarian societies is they say, “In a totalitarian society, you’re not allowed to participate in politics.” No, no. In a totalitarian society, you can’t not participate in politics.

Here’s his view of the modern GOP:

It’s bad. It’s not just a husk. It’s not really, in the normal sense of the term, a political party, because it is entirely a cult of personality. And it’s a cult of personality because most Republican office holders, at the national level at least, are frightened of their voters, which means they don’t like their voters very much. And it means they don’t respect their voters, because they think one tweet from Mar-a-Lago can sic 25 percent, 30 percent, 40 percent, depending on the constituency of these people, on the officeholder. So they’re walking on eggshells at all times. They’re desperately unhappy, because they don’t feel that there’s dignity to their position or their work right now.

And on conspiracy theories:

I think the fact that Mr. Trump’s successful indoctrination of scores of millions of Americans with the belief that widespread voter fraud stole the 2020 election is a frightening example of how easy it is to change the consciousness of large swaths of the American people. No evidence for what he says. He doesn’t really bother to provide evidence, or point to evidence, or suggest where the evidence is.

It’s a little bit like the crazy people who got obsessed with the Kennedy assassination. And their argument was: Proof of how vast and thorough the conspiracy was is that there’s no evidence left of it at all. . . .

When Gen. [John] DeWitt, who’s really the villain of the piece, who was in charge of West Coast defense [during WWII], said, “We have to do something about these potentially disloyal Japanese-Americans,” people said, “Well, what evidence do you have?” He says, “It’s very suspicious, because there’s no evidence whatsoever. It shows you just how sinister that deep secret they’re plotting is.”

In the past two years, I watched (or re-watched) Monica Vitti’s four classic Antonioni films:

I know I’ll sound like an annoying boomer, but we’ll never recreate that classic era of film.