Opinion: The Fed needs to raise rates by one percentage point every meeting to bring inflation down and avoid a job-killing recession
The Fed has targeted inflation, but it is not moving fast enough.
Earlier this month, the Fed raised the federal funds rate by half a point, and further increases of half and quarter points are almost certain for the rest of the economy. year.
In June, it will begin to deplete the nearly $5 trillion in Treasuries, mortgage-backed securities and other securities it has purchased by printing money to fund disaster relief. pandemic.
Now read this: Even a Recession Won’t Cure Inflation, Says Former Obama Adviser Jason Furman
Fed Chairman Jerome Powell lingered as labor markets overheated and told us all the money he printed didn’t matter. Now he believes he can bring inflation down without inflicting too much unemployment.
“ A recession is becoming more and more likely, but the longer we wait, the harder it will be to deal with when we face it. ”
Too much money is chasing too few assets – households and nonprofits have about $3 trillion more in their checking accounts than before the pandemic. To mop up that and other excess liquidity on corporate and other balance sheets, it could take four years at the rate at which the Fed plans to sell Treasuries and mortgage-backed securities.
We run the risk that Powell bows to pressure from the White House to help re-elect President Joe Biden, as President Arthur Burns did for President Richard Nixon and ultimately sparked double-digit inflation.
Recent policy missteps aside, structural issues will make the next decade much more difficult in the United States and Europe than the historic period of mild inflationary pressures of the pre-pandemic years.
The US and broader NATO strategy of trying not to antagonize President Vladimir Putin in an escalation of nuclear or chemical warfare in Ukraine – including not supplying kyiv with jet fighters to provide air cover and weapons to hit military and infrastructure targets in Russia – probably means a stalemate.
Russian and Ukrainian exports of agricultural products W00,
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and the metals will be significantly degraded for years. Other sources of supply can be developed but these will take several years and be more expensive.
Farmers face higher diesel and fertilizer costs, food inflation will persist and shortages of other essential materials, for example nickel to facilitate the transition to green energy, will be exacerbated.
Shortages and delays
Accelerating the shift to green energy and electric vehicles is creating shortages of lithium and other metals needed to build batteries, motors and transmission lines.
It can take up to 10 years to license and build new mines. It is equally difficult to get power lines approved to bring electricity from where the sun shines or where hydroelectricity is abundant to where people need electricity.
Even before Russia invaded Ukraine, global supply chains were not expected to heal this year. Thanks to just-in-time manufacturing and international wage arbitrage, complex manufacturing systems that stretch as far as China and elsewhere in Asia are proving rigid and prone to shortages.
According to Kastle, office occupancy rates remain about half of pre-pandemic levels. Adjustments in the use of commercial buildings – for example, reducing office footprints and converting them to other uses – and the continued construction of work-from-home spaces will be costly.
Even with declining sales, home prices are rising 20% annually as strict zoning and building codes make new construction too expensive within reasonable distances of downtown areas. Mortgage rates have risen above 5% in anticipation of Fed tightening, but at the current rate of inflation, mortgage rates will need to approach 10% to reasonably align demand with supply.
war on oil
China’s zero-COVID policy delayed but did not avert slowing growth and factory closures. While during our pandemic it was difficult to get goods made in China to America, now with COVID raging in Shanghai, Chinese factories are not always making the goods.
Biden is continuing his war on oil and gas by cutting federal land eligible for lease by about 80%, raising royalties by 50% and imposing tougher environmental regulations on drillers.
Even the hawks among Fed officials are putting the neutral federal funds rate that won’t overheat or slow the economy at around 2.5%. It’s way too low and only about half of what needs to be done.
To get inflation to 2%, the Fed would have to raise the federal funds rate at every meeting — roughly every six weeks — by a full percentage point. Through the sale of Treasury securities and mortgage-backed securities, it should also push the 10-year Treasury rate up TMUBMUSD10Y,
A recession is becoming more and more likely, but the longer we wait, the harder it will be to deal with when we face it.
Peter Morici is an economist and professor emeritus of business at the University of Maryland, and a national columnist.
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