Post by the Scribe on Apr 9, 2022 18:52:06 GMT
Opinion: It’s now clear that the Federal Reserve has made a huge monetary-policy error
www.marketwatch.com/story/its-now-clear-that-the-federal-reserve-has-made-a-huge-monetary-policy-error-11649343497?mod=mw_more_headlines
Last Updated: April 9, 2022 at 8:48 a.m. ET
First Published: April 7, 2022 at 10:58 a.m. ET
By Cullen Roche
The central bank took too long to raise interest rates. It’s now playing catchup.
Federal Reserve Chairman Jerome Powell. (Photo by Samuel Corum/Getty Images)
In May 2020 I was on Anthony Pompliano’s podcast describing the likelihood of high inflation in the coming years and the Federal Reserve trying to catch up to it.
Turns out, it all came true since then. I said the following at the time:
“I don’t see how … say, 2021 or 2022, that if the economy is really rebounding that we don’t have 3%, 4%, 5% [core] inflation, and I think you could have the Federal Reserve chasing their own tail raising rates.”
We shouldn’t blame the Fed for everything. After all, the central bank didn’t cause all of the current inflation. That was mostly created by trillions in government spending (the Treasury and fiscal policy) and the complex mess of supply-chain snags during the pandemic.
But the Fed could have done a lot more to get in front of rapid inflation before it got out of hand. And that’s where its response is worthy of criticism.
Unfortunately, the subjective nature of discretionary interest rate policy has left the Fed doing what it typically does: looking at 12-month trailing data in a reactive manner and then responding when it becomes clear that the economy is drunk.
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The Fed now wants to swipe a punch bowl that it should have been watering down long ago. The problem is policy makers are on the verge of swapping the punch bowl with sleeping pills as parts of the economy look increasingly fragile. The Fed is now at risk of tightening policy into an economic slowdown.
Let’s look at the rising risks of recession. Among other indicators:
Flattening and inverted yield curves, which always precede slowdowns and recessions.
fred.stlouisfed.org/series/T10Y2Y
Crashing freight data.
www.freightwaves.com/news/why-i-believe-a-freight-recession-is-imminent
Sharp drop in mortgage applications.
www.mba.org/news-and-research/newsroom/news/2022/04/06/mortgage-applications-decrease-in-latest-mba-weekly-survey
China PMI contraction.
www.reuters.com/world/china/chinas-services-sector-activity-squeezed-by-omicron-surge-caixin-pmi-2022-04-06/
Those signals are leading indicators of a worsening economic slowdown.
At the same time, we’ve transitioned from an economy where a demand-led price shock has increasingly transitioned to a Russian-led supply price shock. And yet the Fed feels the need to play catchup to try to save face in the wake of what is already proving to be a policy error — that is, leaving rates at 0% for too long.
Of course, it’s easy to be critical after the fact, but had the Fed been following a more automated policy approach — I’ve written about a modified Taylor Rule in the past, for example — it would have been more proactive and might have been able to dampen inflation before it was too late.
www.pragcap.com/modified-taylor-rule/
Instead, policy makers relied too heavily on the subjective opinions of a few economists.
I am increasingly concerned that the Fed is on the verge of a significant policy mistake (raising rates into an economic slowdown) after what is already a policy mistake (leaving rates at 0% for too long).
But maybe this isn’t such a bad thing in the long run? Yes, it could all contribute to a recession in the short run, but in the long run it should make us all revisit the notion that 12 economists in Washington, D.C., should have discretion over the most important interest rate in the economy.
Cullen Roche is founder and chief investment officer of Discipline Funds, a financial-advisory firm. He is the author of the Pragmatic Capitalism blog, where this column first appeared. Follow him on Twitter @cullenroche.
disciplinefunds.com/
www.pragcap.com/?mod=article_inline&mod=article_inline
twitter.com/cullenroche?mod=article_inline&mod=article_inline
www.marketwatch.com/story/its-now-clear-that-the-federal-reserve-has-made-a-huge-monetary-policy-error-11649343497?mod=mw_more_headlines
Last Updated: April 9, 2022 at 8:48 a.m. ET
First Published: April 7, 2022 at 10:58 a.m. ET
By Cullen Roche
The central bank took too long to raise interest rates. It’s now playing catchup.
Federal Reserve Chairman Jerome Powell. (Photo by Samuel Corum/Getty Images)
In May 2020 I was on Anthony Pompliano’s podcast describing the likelihood of high inflation in the coming years and the Federal Reserve trying to catch up to it.
Turns out, it all came true since then. I said the following at the time:
“I don’t see how … say, 2021 or 2022, that if the economy is really rebounding that we don’t have 3%, 4%, 5% [core] inflation, and I think you could have the Federal Reserve chasing their own tail raising rates.”
We shouldn’t blame the Fed for everything. After all, the central bank didn’t cause all of the current inflation. That was mostly created by trillions in government spending (the Treasury and fiscal policy) and the complex mess of supply-chain snags during the pandemic.
But the Fed could have done a lot more to get in front of rapid inflation before it got out of hand. And that’s where its response is worthy of criticism.
Unfortunately, the subjective nature of discretionary interest rate policy has left the Fed doing what it typically does: looking at 12-month trailing data in a reactive manner and then responding when it becomes clear that the economy is drunk.
NOW PLAYING:
Will Smith Is Banned From Attending Oscars Ceremonies for 10 Years
Visit our Video Center
The Fed now wants to swipe a punch bowl that it should have been watering down long ago. The problem is policy makers are on the verge of swapping the punch bowl with sleeping pills as parts of the economy look increasingly fragile. The Fed is now at risk of tightening policy into an economic slowdown.
Let’s look at the rising risks of recession. Among other indicators:
Flattening and inverted yield curves, which always precede slowdowns and recessions.
fred.stlouisfed.org/series/T10Y2Y
Crashing freight data.
www.freightwaves.com/news/why-i-believe-a-freight-recession-is-imminent
Sharp drop in mortgage applications.
www.mba.org/news-and-research/newsroom/news/2022/04/06/mortgage-applications-decrease-in-latest-mba-weekly-survey
China PMI contraction.
www.reuters.com/world/china/chinas-services-sector-activity-squeezed-by-omicron-surge-caixin-pmi-2022-04-06/
Those signals are leading indicators of a worsening economic slowdown.
At the same time, we’ve transitioned from an economy where a demand-led price shock has increasingly transitioned to a Russian-led supply price shock. And yet the Fed feels the need to play catchup to try to save face in the wake of what is already proving to be a policy error — that is, leaving rates at 0% for too long.
Of course, it’s easy to be critical after the fact, but had the Fed been following a more automated policy approach — I’ve written about a modified Taylor Rule in the past, for example — it would have been more proactive and might have been able to dampen inflation before it was too late.
www.pragcap.com/modified-taylor-rule/
Instead, policy makers relied too heavily on the subjective opinions of a few economists.
I am increasingly concerned that the Fed is on the verge of a significant policy mistake (raising rates into an economic slowdown) after what is already a policy mistake (leaving rates at 0% for too long).
But maybe this isn’t such a bad thing in the long run? Yes, it could all contribute to a recession in the short run, but in the long run it should make us all revisit the notion that 12 economists in Washington, D.C., should have discretion over the most important interest rate in the economy.
Cullen Roche is founder and chief investment officer of Discipline Funds, a financial-advisory firm. He is the author of the Pragmatic Capitalism blog, where this column first appeared. Follow him on Twitter @cullenroche.
disciplinefunds.com/
www.pragcap.com/?mod=article_inline&mod=article_inline
twitter.com/cullenroche?mod=article_inline&mod=article_inline