OPINION:
The Federal Reserve is getting serious about inflation — but hardly serious enough.
Last week, the Fed boosted the federal funds rate by half a point and anticipates more half and quarter point increases over the remainder of the year. It will modestly start running down the nearly $5 trillion in Treasury, mortgage-backed and other securities it purchased by printing money to finance pandemic relief.
With the Consumer Price Index posting 8% gains, that’s like facing a charging elephant with a pea shooter.
When Paul Volcker took over the Fed, he followed a period of similar disbelief about entrenched inflation — and boosted the target interest rate nearly 7% points in 8 months and ultimately to 19%.
Chairman Powell has dallied while labor markets overheated, told us all the money he was printing didn’t matter and predicted inflation would fix itself. That dismissed history, and surging gas and grocery prices are a testimony to just how much trouble we can get into with a politically inspired lawyer in charge of the central bank.
Too much money is chasing too few goods — households and nonprofits have about $3 trillion more in their checking accounts than before the pandemic. To mop up most of the excess liquidity would take at least 4 years at the pace the Fed expects to sell off the securities it purchased.
About one-third of American households get along on $50,000 a year and less. They are turning to generic products to trim food bills and eating less healthy choices — soon some could be skipping meals.
With Lisa Cook coming on the Fed Board, we will hear that taming inflation fails to weigh the concerns of minorities. And we face the danger that Mr. Powell will bend to White House pressure to help reelect President Joe Biden, as Chairman Burns did for President Nixon and ultimately unleashed double-digit inflation.
Home prices are rising because tough zoning and building codes make new construction too expensive within reasonable distances from city centers. Mortgage rates have zoomed to 5% in anticipation of Fed tightening, but homes remain in short supply. Even with sales declining, prices are rising 20 percent a year.
At the current pace of inflation, mortgage rates will have to jump to nearly 10% to reasonably align demand with supply.
Even before the Russians invaded Ukraine, global supply chains were not expected to heal this year. The pandemic has permanently shifted work and consumer spending patterns and thanks to just-in-time manufacturing and international wage arbitrage, complex manufacturing systems that stretch to China and elsewhere in Asia are proving inflexible and predisposed to shortages.
The pandemic has only recently caught up with China. Its zero COVID-19 policy delayed but did not avoid factory shutdowns.
Whereas during our pandemic it was tough to get the goods made in China to America, now with COVID-19 spreading through Shanghai, Chinese plants aren’t always making the goods.
Russia and Ukraine formerly accounted for 30% of the global wheat supply plus lots of other agricultural commodities and fertilizer building blocks. Farmers elsewhere, who we hope can make up for those crops, face escalating diesel and fertilizer costs.
The current food price inflation will continue unless the Fed pounds the economy into a cleansing recession.
Accelerating the shift to green power and electric vehicles is creating shortages of lithium and other metals necessary to build batteries, motors and transmission lines.
It can take up to 10 years to permit new mines. Getting high-tension power lines approved to bring electricity from where the sun shines to where folks need electricity is a similar morass.
President Biden continues his war on oil and gas by slashing the federal lands eligible for leasing some 80%, jacking royalty charges 50% and imposing tougher environmental regulations on drillers.
The Fed is not going to get a lot of help abroad. Central banks in China, Japan and the EU are hesitating to tackle inflation.
Even the hawks among Fed officials place the neutral federal funds rate that will neither overheat nor slow the economy at about 2.5% — that compares to the new target of about 0.9 percent.
Both are far too low and the wrong bull’s eye.
To get inflation to 2%, the Fed should raise the federal funds rate at each meeting — approximately every six weeks — a full percentage point. Through the sale of Treasury and mortgage-backed securities, it should similarly push up the 10-year Treasury rate.
That would instigate a recession — and Lisa Cook to turn blood red — but the longer we wait, the tougher will be the medicine when we face it.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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