OPINION:
In March, the Federal Reserve will likely start raising interest rates — perhaps three or four quarter-point steps over nine months. That’s hardly enough to bring inflation down to 2%.
Ripping at 7%, the demand for goods and services will continue to exceed supply.
Omicron has cemented hybrid work — adding to housing inflation in more distant suburbs and communities beyond commuting distance from major job centers. Boosting mortgage rates less than a percentage point will hardly tame housing costs.
Household and corporate balance sheets are flush with enough unspent stimulus cash that the continued shift to goods from services like lunches at big-city eateries is hardening into permanent patterns. Even with slightly higher financing rates, automakers and manufacturers of distance working equipment will have the latitude to raise prices.
Supply chains remain brittle — witness shortages at grocery stores — and will improve slowly. Chip shortages will constrain supplies of cars and electronic gadgets into 2023.
Restaurants and retailers must pass along higher costs for food, labor and periodic shutdowns for slack traffic imposed by new COVID strains. Otherwise, they fold.
Better distance collaboration software is coming. Real eye contact and a genuine sense of presence from innovations like Google’s Starline will prove precursors of a metaverse that’s a workplace more than a destination for gaming and concerts. The payoffs will be big, and tech companies don’t need to borrow to invest.
When Paul Volcker became Fed chair, inflation was nearly 12%.
I spoke with him at that time and was impressed by his understanding of the distortions inflationary expectations imposed on asset purchases — in particular, housing which was going through shortages of building sites then too.
A more forceful figure than his predecessor, William Miller, and less political and facile than Chair Jerome Powell or European Central Bank President Christine Legarde, he jacked the federal funds rate nearly seven percentage points in eight months. The economy slipped into recession, he eased back and then hit peddle to the metal by boosting the key policy rate to 19%.
These days such radical action is not likely necessary, but monthly one percentage point increases until inflation is 2% again would do nicely.
It’s hard to say the labor market is not at full employment with the jobless rate at 3.9% and more than 10 million jobs unfilled. It’s equally hard to say we are at full employment with so many folks displaced from old-line service jobs still sitting on the sidelines. Interest rates should be pushed enough to cause some additional joblessness, or inflation will continue to outrun wages, exacerbate inequality for many years and tax the elderly who disproportionately rely on various forms of fixed income investments.
We don’t need another giveaway of supplemental unemployment benefits that exceed lost wages. Rather relocation and retraining incentives and grants to enroll in Department of Labor apprenticeship programs. State unemployment benefits should be portable for those who move cross-country for training.
Volcker-like increases in the federal funds rate would flatten or invert the yield curve — that’s when short rates rise more than long rates — and further consolidate banking.
Simply, banks rely on the spread between long rates on mortgages and the like and short rates for what they pay for deposits and other loanable funds. Small banks rely more on loan income and big banks more on fees on trading, electronic payments and the like.
The last thing America needs — other than another COVID shutdown — is to precipitate more bank consolidation that lessens competition and boosts big-bank bonuses.
Since 2008, the Fed has paid commercial banks interest on reserves they keep at the central bank. Tipping the yield curve could make the interest the Fed pays banks greater than it collects on bonds and throw it into deficit.
Since the Fed can print money for any foolishness it chooses — the pandemic proved that — it can photocopy its way out of that corner. But what an embarrassment!
The Fed should supplement bigger rate hikes in the federal funds rate by selling off some of its long-term Treasury and mortgage-backed securities to boost long rates.
This would steepen the yield curve to avert central bank losses and suck liquidity out of the system where it does the most harm — too much demand for big ticket items like cars and homes.
The whole issue of running down the balance sheet has Fed policymakers flummoxed. However, as chronically bad calls on inflation at both the Fed and ECB have established, the kind of prescience and clarity of thought Mr. Volcker brought to the Fed is not a salient characteristic of central banks run by politically driven lawyers.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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