While the Federal Reserve did the right thing by increasing its target by three quarters on Thursday, it remains an open question whether the central bank will continue to do the right thing.
Friday’s announcement that the consumer price index (CPI) rose to a 40-year high in May stunned the Fed over its arrogant belief that inflation will rise in March. Notably, the Fed took this view in the first place after being surprised by higher-than-expected inflation for more than a year. highest inflation new temporaryIt’s a viable theory that has led the Fed to believe it will avoid hard choices. Like its predecessor, it is in the dustbin of history.
More important than the very high headlines of one percent per month are the data that show that inflation is not only rising, but spreading. Gone are the days when pigeons could point to certain things causing inflation. The CPI report for May showed inflation everywhere. The dam collapsed and flooding began. Cleveland’s cropped-average inflation, which measures emission-free inflation in both directions, rose to an all-time high at 6.5 percent per year. Median inflation, another key measure of price pressure calculated by the Cleveland Fed, rose 5.5 percent.
Fed Chairman Powell said at a press conference that Fed officials expected progress, but it was not accepted. “In many ways, we’ve seen the opposite,” said Powell.
On June 15, 2022, traders were on the New York Stock Exchange as the Federal Reserve announced a rise in interest rates. (TIMOTHY A. CLARY/AFP via Getty Images)
Beyond historical data on where prices are headed, rising inflation expectations are likely to be the real reason for Fed officials’ concern. The Fed believed it was easier to control inflation as long as long-term inflation expectations did not change. Sudden expectations can change and are particularly affected by changes in food and gas prices. Long-term expectations are unlikely to change much; So when they do, they get attention. Measuring the University of Michigan’s inflation expectations showed the first signs of steady easing, prompting the Fed to push it higher.
Perfect disinflation design
We liked the Fed’s forecasts and reviewed many of them critically.
In March, the Fed forecasts 2.8% growth this year. The Fed certainly doesn’t have the luxury of knowing that the economy will contract in the first quarter. However, this forecast looks very optimistic due to the likely course of the gas price and current supply chain issues. Now the Fed has moved to a more realistic 1.7% forecast and revised its forecast for next year again from 2.2% to 1.7%. It’s a big change in just a few months, and it’s great that Fed officials are open-minded enough to change their stance once the realities on the ground become clear.
They may need to be changed again. The Atlanta Fed’s GDP tracker fell to zero for the second quarter on Wednesday as April stocks were weaker than expected and retail sales in May. Retail sales data for May show gas prices are now rising in the rest of the economy, leaving households with less cost in appliances, appliances and other products. While the Atlanta Fed’s GDP may partially stabilize in the coming weeks, a zero result a few weeks before the end of the quarter poses a risk of negative growth for the second quarter in a row.
Federal Reserve Board Chairman Jerome Powell testifies before the House Financial Services Committee in Washington DC on March 2, 2022. (Vin McNamee/Getty Images)
In addition, the Fed is very confident that it can bring inflation down with minimal economic loss. Unemployment is expected to rise to 3.7 percent by the end of this year, to 3.9 percent next year and to 4.1 percent next year. It’s important to note that the Fed believes the long-term unemployment rate is four percent. As such, the Fed’s massive campaign to curb inflation is expected to benefit by not pushing unemployment above its long-term trend of less than one-tenth percent in three and a half years. Meanwhile, inflation is expected to be 5.2 percent this year compared to the 4.3 percent forecast in March, but the 2.6 percent and 2.2 percent forecasts for next year and beyond, respectively, are lower than in March.
Powell clearly convinced his colleagues at the Fed of a new theory that we might also call “perfect disinflation.” According to this theory, the Fed can reduce inflation by eliminating overwork in the economy. Over the past few months, surveys have shown vacancies and employee turnover with around two jobs for every unemployed person. Powell’s idea was that the Fed’s tightening could cut those jobs without completely damaging actual work. It’s an elegant theory for removing jobs people don’t have instead of jobs they have, but it’s also untested and very useful. This idea replaces temporary inflation together highest inflation.
The more common approach suggests that inflation will only be reduced to the Fed’s 2% target if unemployment rises above the long-term trend for an extended period of time. This may not be entirely true – economic policies related to energy and manufacturing can increase local supply to meet demand – but it’s worth noting how unique Powell’s theory is.
Powell said on Wednesday he doesn’t think a 75 basis point rate hike will be standard operating procedure. But he said six weeks ago that the 75 basis point increase was not discussed at that meeting. Given the unrealistic rate and inflation forecasts, it’s hard for us to rely on the latest specifications.
Source: Breitbart
