“the Fed intends . . .”

This Bloomberg story is pretty discouraging:

The Fed needs to slow an economy that is “clearly overheated” as it comes out of the pandemic, said Krugman, a City University of New York professor.

Inflation — which is already at a 40-year high and more than three times the Fed’s 2% target — looks set to accelerate again as supply disruptions from the Ukraine war boost food and energy prices. The labor market is, in the words of Powell, “extremely tight,” with 1.7-plus job openings for every unemployed person.

To try to take the edge off demand, the Fed intends to raise interest rates “expeditiously” to more normal levels and is prepared to push them into “restrictive” territory if necessary to achieve price stability, Powell told a conference of economists on March 21.

Paul Krugman is not normally viewed as a hawk, and even he believes that policy is too expansionary. But what really caught my eye is the term “intends”. Instead of intending to do something about the problem, why isn’t the Fed doing something right now? Indeed why haven’t they been tightening since it became clear the economy was overheating?

The quarter point rise in the Fed’s target rate at the last meeting didn’t even keep up with the rise in the equilibrium rate of interest. Money is getting easier. And why has Powell stopped talking about maintaining an average inflation rate of 2%? What happened to that big new policy initiative?

Milton Friedman and Anna Schwartz wrote a very long history of monetary policy in the US. Allan Meltzer wrote a very long history of the Federal Reserve. Want a Cliff’s Notes version of the two books? How’s this for a summary:

Once again, the Fed was behind the curve.

The whole purpose of FAIT was to prevent this sort of major overshoot. It’s a pity they abandoned the policy.

PS. Michael Darda directed me to a SF Fed study that suggests the current high inflation is due to . . . you guessed it . . . fiscal policy. No mention of monetary offset.

And so we’ve come full circle and are right back in the intellectual milieu of the late 1960s.

Milton Friedman is rolling over in his grave.



39 Responses to ““the Fed intends . . .””

  1. Gravatar of Brett Brett
    28. March 2022 at 11:45

    I think they’re hoping they can set counter-inflationary expectations and get inflation down more gradually, without sparking a recession. A sudden shift that might spark really high interest rates could cause a recession (like the early 1980s), and have international ramifications (IE cause a bunch of money to flee poorer countries for the higher interest yields in the US right at a time when food prices are spiking upwards).

  2. Gravatar of Lizard Man Lizard Man
    28. March 2022 at 12:44

    Is it possible for the Fed to be ahead of the curve? I think the states are “getting it right”, and “behind the curve”.

  3. Gravatar of ssumner ssumner
    28. March 2022 at 12:54

    Brett, But why not do enough to at least slow the economy? Right now it’s still accelerating.

    I’m not asking for 2% inflation this year; I’d be happy with 4% NGDP growth this year.

    Lizard, Getting ahead would also be bad, like turning the car before you reached the corner.

  4. Gravatar of Michael Sandifer Michael Sandifer
    28. March 2022 at 12:56

    Over the past month, I’ve finally become increasingly convinced money is too loose. long-run inflation expectations have risen significantly over the past month, and the window for avoid a recession is closing. Yes, the Fed is not responding fast enough.

    Also, given imputed NGDP, along with the inflation expectations, it appears real growth is expected to remain relatively low for years, with expections having fallen recently, with many reasons being obvious. Yet, the mean expected NGDP growth path is creeping back up to 5%.

  5. Gravatar of Michael Sandifer Michael Sandifer
    28. March 2022 at 12:58

    Actually, it’s more correct to say my perspective has mostly changed over the past 2 weeks, but is based largely on the rise in inflation and fall in real growth expectations over the past 30 or so days.

  6. Gravatar of Sean Sean
    28. March 2022 at 15:40

    I don’t think the issue is the fed having the wrong framework on causing inflation.

    The issue is they target interest rate volatility too. I believe Woodford made an equation on that. They prefer to move in a steady direction instead of just setting the interest rate at the equilibrium rate. They want to get to equilibrium slowly instead of doing it all at once.

    They should probably just hike 150 bps or something like that to roughly where the market seems to be pricing equilibrium. And then having a neutral policy stance for the next move.

  7. Gravatar of msgkings msgkings
    28. March 2022 at 22:12

    @Sean: that’s a guaranteed big curve inversion and recession 6 months later. Not even trying the soft landing.

  8. Gravatar of Effem Effem
    29. March 2022 at 06:16

    Of course when it comes time to bail out banks they don’t telegraph the move for months on end – they dive in and do it. There is a very clear asymmetry in the Fed’s reaction function.

    Going forward any target variable will have to be assumed to be a “floor” with periodic overshoots unless this asymmetry is fixed (doubtful).

  9. Gravatar of Effem Effem
    29. March 2022 at 06:18

    Scott, slightly off topic but I have an academic question.

    We know monetary policy doesn’t have real effects in the long-run. Can you explain in layman terms why a cut in interest rates doesn’t produce more investment, which then boost long-term productivity?

  10. Gravatar of Michael Rulle Michael Rulle
    29. March 2022 at 06:27

    What is odd, is that Powell is aware of this. I can only assume he is still hanging on to his transitory theory——-which he claimed before the war, which makes it less plausible now ——-so why is he waiting? Because he is hoping transitory theory still has juice——I cannot think of any other reason.

  11. Gravatar of David S David S
    29. March 2022 at 06:48

    Firefighter: “We need to wait until more of your house burns down before we can put water on it.”

    Mechanic: “Be sure to keep the RPM’s on your engine into the red zone for at least 10 minutes.”

    Doctor: “You need to keep smoking 4 packs a day for another few years before I prescribe a nicotine patch.”

  12. Gravatar of Jeff Jeff
    29. March 2022 at 06:56

    Not even 1 year ago! “Fed Chair Powell says won’t allow ‘substantial’ overshoot of inflation target”


  13. Gravatar of w d w w d w
    29. March 2022 at 07:03

    just curious since the cause of inflation is because of supply chain and production shortage, how does increasing interest rates help resolve those problems? and how does it have to be done so that what happens is that demand craters and supply des too, since supply will need to have access to funds to fix the supply issue?

  14. Gravatar of w d w w d w
    29. March 2022 at 07:04

    just curious since the cause of inflation is because of supply chain and production shortage, how does increasing interest rates help resolve those problems? and how does it have to be done so that what happens is that demand craters and supply des too, since supply will need to have access to funds to fix the supply issue? ?

  15. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. March 2022 at 07:11

    re: “Money is getting easier”

    Powell is ignorant and arrogant. Powell cited 1965, 1984, and 1994 as examples where the FED corrected the economy without causing a recession. But the current situation isn’t caused by a lack of demand. It’s caused by too much money.

    Powell said: “The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago”

    We knew the precise “Minskey Moment” of the GFC based on the monetary aggregates:
    AS I POSTED: Dec 13 2007 06:55 PM |
    The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
    10/1/2007,,,,,,,-0.47 * temporary bottom
    11/1/2007,,,,,,, 0.14
    12/1/2007,,,,,,, 0.44
    01/1/2008,,,,,,, 0.59
    02/1/2008,,,,,,, 0.45
    03/1/2008,,,,,,, 0.06
    04/1/2008,,,,,,, 0.04
    05/1/2008,,,,,,, 0.09
    06/1/2008,,,,,,, 0.20
    07/1/2008,,,,,,, 0.32 peak
    08/1/2008,,,,,,, 0.15
    09/1/2008,,,,,,, 0.00
    10/1/2008,,,,,, -0.20 * possible recession
    11/1/2008,,,,,, -0.10 * possible recession
    12/1/2008,,,,,,, 0.10 * possible recession
    RoC trajectory as predicted.

  16. Gravatar of Effem Effem
    29. March 2022 at 07:34

    wdw, the Fed has no tools to affect supply one way or the other.

    In the face of a supply shock they can either: a) right-size demand to match supply to bring down inflation or b) ignore supply constraints and support demand at the risk that higher inflation expectations become embedded and inflation becomes a long-term problem.

    If you want more productivity, you’ll have to look to the private sector and fiscal/regulatory policy.

  17. Gravatar of w d w w d w
    29. March 2022 at 08:02

    not sure that we can depend on the private sector (based on how business invests or doesnt in its own business, but invests heavily in stick buy backs, it doesnt look like business thinks that investing in the business is worth doing), and which part of regulatory policy would you change? the ones that protects individuals, or business? and if some would protect business, while harming individuals, where do think buyers for their products come from?

  18. Gravatar of Effem Effem
    29. March 2022 at 08:25

    I didn’t say we would GET higher productivity. I said the central bank has nothing to do with it.

    In my opinion there is quite a lot of low-hanging fruit on the regulatory side that is effectively blocked by various stakeholders. The most obvious example is fewer zoning restrictions for home construction. But that gets blocked by all those who prefer the status quo and the higher values (inflation) that come with it.

    Productivity (unlike monetary policy) lifts all boats. Profits and wages can (and should) rise together if we are more productive. Money creation on the other hand is zero-sum in the long-run (although there will be individual winners and losers, of course).

  19. Gravatar of w d w w d w
    29. March 2022 at 08:42

    well oddly enough we have a had a long time of high productivity, with few boats getting lifted, as wages haven grown much in the last 30 or so years, but productivity has grown immensely in the same period.

  20. Gravatar of Effem Effem
    29. March 2022 at 09:09

    That’s not entirely true. Some of those “wages vs productivity” analyses ignore the increased value of benefits (healthcare inflation) and use incorrect price series.

    But I think it’s safe to say the wage share has fallen. But this has nothing to do with the central bank. Regulatory policy should be focused on creating more competition where there is little.

  21. Gravatar of ssumner ssumner
    29. March 2022 at 10:06

    Sean, In that case, why not start raising rates sooner?

    Effem, The boost to the capital stock is temporary, as capital depreciates.

    wdw, The point is to reduce that portion of inflation caused by excess demand. In other words, reduce the excess demand.

  22. Gravatar of Mike Mike
    29. March 2022 at 11:13

    How much of the high inflation can actually be attributed to fiscal policy? The SF Fed says 3 percentage points but this seems too high when it’s really monetary policy that is driving it.

  23. Gravatar of KKLARICH KKLARICH
    29. March 2022 at 11:17

    Is this monetary inflation or something else? Too much money, supply chain issues, shifts in demand from services to goods and back to services, or an increase in profit taking by firms.

    What is clear is our ability to determine what is a fair price has broken down. We were used to a relatively smooth linear path for prices increases and firms and consumers were able to make educated guesses of what a fair price or price increase was. That process has broken down. Every day we are inundated with stories of supply chain snarls, low income/productivity firms unable to find workers, chips shortages, and now the Ukraine war. So, firms now have an asymmetric information advantage, and we are seeing many firms raising prices greater than their increased costs. In the financial press, there are daily reports of firms reporting record profits. And as result, analysts are predicting a much faster slow down in the economy than any Central Bank signaling could create by raising the interbank interest rate, as consumers’ ability to purchase shrinks.

  24. Gravatar of Effem Effem
    29. March 2022 at 11:31

    Scott, is that one-time boost to the capital stock a real effect, while it lasts? Or is it somehow “reversed” on the back-end of the process?

  25. Gravatar of w d w w d w
    29. March 2022 at 12:04

    so you can spend benefits? news to me. never seen that in 30+ years of working in the US. and benefits have been cut a lot, health insurance isnt so robust and cost isnt as low as was. so its not like benefits have increased. if we reduce demand, how do we not kill the economy? and i do wonder are we comparing 2022 to 2021 or 2020 results and demand, ignoring that in those years lots of stuff wasnt needed, and couldnt be afforded if even desired, and of course the impact in demand was enormous, and companies reacted by closing facilities, laying off large numbers or workers. and some dont even recognize that lay offs can be fatal at worst, as in the last decades, there were no jobs to go to if yours ended.

  26. Gravatar of w d w w d w
    29. March 2022 at 12:11

    another minor observation on ‘benefits’ there are no health benefits today that cover %100 of health care (it may have existed long ago. but its long gone now). at best its may cover %80 of care (and thats after discounts negotiated by insurers), leaving patients to cover that cost. its little wonder that the majority skip care unless its to painful to do so. course today, a large number of companies have no benefits at all. and they only get care when they go to the ER.

  27. Gravatar of Effem Effem
    29. March 2022 at 12:34


    I’m not arguing it has been a worker’s paradise – it has not, labor share has fallen. But the Fed doesn’t possess any tools to affect this.

    Having said that, the fall in labor share is often overstated because of yes, benefits (which i’m happy to receive) and because of housing gains which have accrued to labor.

    What do you mean by “kill the economy?” High inflation has the potential to reduce real wages and further skew the wealth distribution via asset gains. As best I can tell, we are currently “killing the economy” for those who don’t own a home or pro-inflation financial assets. Real wages are falling but assets are approaching all-time highs – that’s success to you? We need to stop obsessing over the unemployment rate – many other variables matter.

  28. Gravatar of w d w w d w
    29. March 2022 at 13:01

    well the US is a consumer based economy (no matter that some might not like that). if the US business responds as they have always done so far for decades, unemployment will skyrocket (not might), and then demand will collapse(not might). that would be much worse than inflation, the economy is dead, there is little to no activity of any sort (other maybe the Feds),
    the worst it could get is to be worse than 2020 and the great depression. combined. thats what i would expect to happen based on past performance
    well unemployment rates matter if you have a consumer based economy. as without the consumer, the economy would shrink by up to %50 or more. and its not like we havent seen the other type of economy. its not better in any shape or form
    and benefits came into existence during WW2, because employers couldnt raise wages. and benefits were cheaper then also. and covered more. today, almost all are in the position to hope to never need to use them. and do we today also account for those benefits of the past 80 years as ‘wages’ also?

    while inflation appears worse, but is it? it seems that to determine that we compare the current year to the proceeding year. well, comparing 2022 to 2021, would be comparing an economy that is still recovering from 2020, to one that is a bit further along
    and i do agree maybe, just maybe, raising rates will slow it down, but just how far above what is the closest we have to ‘normal’ year, are we? That being 2019.

  29. Gravatar of w d w w d w
    29. March 2022 at 13:06

    if employment rate isnt so important (as we are lead to believe). what is? and is available regularly, and would the entire population be able to relate it to their own lives? inflation is sort of easy, people have been trained for decades to avoid paying more than they have too. which in many industries if they are smart, know that they are getting really close to going over what the consumer will accept. and heaven help them when that happens, industries could be hurt badly loosing customers that only buy only what they need

  30. Gravatar of Doug M Doug M
    29. March 2022 at 13:43

    Did the Fed actually adopt the FAIT policy? They announced a policy, but their actions never aligned with their rhetoric. Until they do what they say they will do, the market will react to their word with a collective yawn.

    Of course, this means that when it is time to act, the Fed will have to work that much harder. When the market believes the Fed will act in a timely manner the “bond market vigilantes” will do the fed’s work for them. At least they did in the ’90’s.

  31. Gravatar of Sean Sean
    29. March 2022 at 14:36

    Scott – they were wrong in the fall. Maybe that’s framework but they made a mistake not ending QE earlier. But right now I think they know they are too loose; but their afraid or institutional inertia from moving to neutral faster or in a limp sum.

    Msgkings – why would that invert the curve and guarantee a recession. 150 bps here with a neutral stance would be below basically all maturities of treasuries. Market still believes in a 2 to 2.5 area for neutral rates so 150 next meeting which still probably keep them slightly below neutral. And if they targeted the forecast they could even be cutting slightly soon.

  32. Gravatar of Effem Effem
    29. March 2022 at 15:01

    Funny how “institutional inertia” doesn’t apply when it comes time to bail out banks or bend the rules to buy corporate bonds. Pretty clear to me that the Fed’s reaction function is asymmetric…which means outcomes will be as well (as we are currently seeing).

  33. Gravatar of ssumner ssumner
    29. March 2022 at 15:14

    Mike, All of the excessive inflation is due to monetary policy, none to fiscal policy. The non-excessive part of inflation is due to supply problems.

    KKLarach, NGDP growth has been excessive, so it’s not all supply.

    Effem, Yes, real while it lasts.

    Doug, They did FAIT for roughly a year, then gave up.

    Sean, If they were wrong, then it’s extremely important they move very fast to correct the error. They are moving slowly. It’s like driving a car—you prefer gradual adjustments in the steering, but if far off course you may need to do an abrupt and sudden adjustment.

  34. Gravatar of Doug M Doug M
    29. March 2022 at 16:04

    Did they do FAIT for over a year? They claimed that they were targeting an average inflation rate. But when the time came to tighten money in-line with their stated policy, they failed to act. Instead, they talked about the supply chain.

    If you fail to follow your policy, you don’t really have a policy.

  35. Gravatar of Doug M Doug M
    29. March 2022 at 16:21

    Regrading the PS on fiscal policy and the monetary offset….

    We should expect a monetary offset if the Fed is targeting, well anything. That is the fiscal authority increases spending. The monetary authority either pro-actively or reactively reduces the money supply to keep growth / inflation / unemployment on target. Since the monetary lever is more powerful than the fiscal lever, the monetary authority wins and fiscal stimulus has no effect.

    But, if the Fed is distracted, or refuses to act, then fiscal stimulus can trigger inflation. Over 2020 – 2021 we saw massive fiscal and monetary stimulus to support people through the pandemic. Since the Fed is more nimble than Congress, they should have been the ones to act when inflation started to percolate. But they didn’t. We can blame fiscal stimulus, but we should blame a passive Fed.

    We can blame supply chain disruptions for temporary and localized inflation. Broad-based and continued inflation — that is too much money chasing not enough goods.

  36. Gravatar of Jeff Jeff
    29. March 2022 at 22:57

    >if employment rate isnt so important (as we are lead to believe). what is? and is available regularly, and would the entire population be able to relate it to their own lives?

    Isn’t price stability (or, at the very least, non-negative real interest rates) the obvious answer? Employment in the vast majority of cases is a matter of negotiation between private parties, but a stable-valued currency (or positive real interest rates) is a service that governments can either provide to their citizens or not. If there is no safe means of saving without incurring significant real losses, doesn’t that curtail the ability of an individual or family to make plans for the future?

  37. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. March 2022 at 05:10

    Powell broke the economic engine. It is time for a command economy and credit allocation.

  38. Gravatar of Sean Sean
    30. March 2022 at 05:38

    One other issue they had was being market based.

    30 year treasuries were not showing a need to be more aggressive 6 months ago.

  39. Gravatar of ssumner ssumner
    30. March 2022 at 08:15

    Doug, In my view, they were following FAIT as long as NGDP growth was reasonable. Perhaps it was a bit less than a year, but in my view by far the biggest mistake was publicly abandoning FAIT, which occurred in late 2021

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