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It's been so long since we last fought stubborn inflation that many, maybe even most, Americans, including policymakers and central bankers, have forgotten how “unstable” inflation expectations can be and what that really means for the fight ahead.
Recently, James Bullard, president of the Federal Reserve Bank of St. Louis, had this to say about current inflation and potential downside risks:
“Current U.S. macroeconomic conditions undermine the Fed's credibility with regard to its inflation targeting,” Bullard said.
Bullard said near-term inflation expectations among financial markets, households and businesses have risen over the past year, adding that the gap between actual inflation and Treasury-based inflation expectations needs to close, potentially allowing inflation expectations to rise further.
“Inflation expectations became unstable in the 1970s and it took the Fed many years to bring inflation back down to low levels, destabilizing the real economy along the way,” Bullard said.
Like a ship drifting on the high seas, once inflation expectations are “anchored,” people's inflation concerns will drift further and further away from the place where they were once so stably anchored, and will drift aimlessly into the distance.
And once it gets blown away by the epic storm of new economic headwinds, it's not easy to get inflation back on track, given the forces and volatile fluctuations that can result when inflation picks up steam and really starts to get out of control.
At this point, I think it's fair to say the Fed has completely lost sight of the story.
Everywhere you go, people are talking about inflation in some form or another: rising gasoline prices, food prices, new car inventory and prices, used car inventory and prices, insane home sales sparking bidding wars over $200,000, $300,000, even $500,000. The influence of hot money seems to be everywhere.
COVID-19 has begun to disrupt normal business, best evidenced by a recent, completely unsolicited conversation I had with an older local restaurateur. He simply seemed distressed as he described how difficult things have become. After fighting to stay afloat for more than two years during the pandemic, he is now being pushed to his limits by price hikes. My bill, too, is now 30-40% higher than what I was paying nearly a year ago.
But this small anecdote pales in comparison to the damage caused by the Fed’s inaction and the Administration’s totally incompetent and disorganized approach to “leadership.”
The Fed, which has insisted that inflation is “transient,” has been forced to backtrack on that term and pivot to more nuanced language describing Ukraine, supply chain issues caused by the Chinese lockdown, and ongoing COVID-19 disruptions as only “transient,” which represents a completely misguided or misguided approach to managing market expectations.
The Fed either does not understand that the inflation we see today is general monetary inflation that has resulted from 13+ years of reckless monetary easing (QE, ZIRP) and still believes that current exogenous events are causing it, or they fully understand the truth but simply do not want to show it publicly.
In the latter case, the Fed would have been wise to at least hint early on at the possibility of monetary inflation as a cause, while also listing any other causes they wanted, rather than focusing entirely on exogenous “transient” causes and then appearing completely unrealistic when the inflation lasted longer than the word “transient” would suggest.
Yet remarkably, Mr. Powell and other members of the FOMC appear not to have learned from this mistake, stating yesterday:
Russia's aggression in Ukraine is causing enormous human and economic hardship. The aggression and related events are creating further upward pressure on inflation, weighing on global economic activity. In addition, COVID-19-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is paying very close attention to inflation risks.
Again, while they emphasize that temporary conditions are the cause of persistent inflation, they only vaguely hint at some other cause by saying that they are “creating additional upward pressure,” essentially putting emphasis on the word “temporary.” Additional to what?
The “what” is something they apparently don't want to discuss openly: the general monetary inflation that they themselves (including former Chair and now Treasury Secretary Yellen) created in their efforts to act as lender of last resort after the Great Recession, and that continues to this day.
By not being forthright about the causes of inflation, they will continue to appear hopelessly out of touch with reality and uninformed — the exact opposite of what is needed to truly restore market confidence.
Meanwhile, the Administration has tried to control the inflation debate as if it were a purely partisan political issue, and it has been a complete failure.
Whether it's appearances on popular late-night television shows or various inflation-themed photo shoots, the administration seems to believe it can quell inflation by assuring the public that the administration “understands their pain,” but this is entirely the wrong approach.
Trying to control inflation simply by messaging the public directly (regardless of the content of the message), like Ford's ridiculous “stop inflation now” campaign or Carter's sad, depressing fireside chats, is counterproductive at best.
The only thing the public needs to see is action to be convinced that the administration is on the right track in fighting inflation.
This can take many forms: asking Congress to tighten the budget to avoid further deficits, restarting or expanding energy sources that have been halted or mothballed (pipelines, coal, the number of rigs in the Gulf of Mexico, the Anwar oil field, etc.), working to mitigate disruptions to global trade and supply, negotiating new agreements with other trading partners, and eliminating all vestiges of pandemic-related burdens.
Yet the current administration has completely missed this point, squandering this very brief moment when talk of inflation is not yet deeply ingrained in the collective psyche of Americans.
Taken together, the Fed's misinterpretation of the causes of inflation and the Administration's lack of leadership are now working to seriously erode trust and begin to sow the seeds of long-term, deep-seated inflation as the public learns to expect ever-present uncertainty, volatility, cost pressures, and a lack of vision from the officials tasked with leading our way out of these difficult times.