President Biden’s unfavorability poll number, according to the Real Clear Politics average, is 52.6%. To be fair, Fed Chairman Jerome Powell’s ultra-easy monetary policy is directly responsible for part of that high unfavorability rating.
The CPI is up 8.9% annualized over the past three months, while gaining 6.9% on a year-over year-basis. Over the past three months the core CPI, which removes volatile food and energy prices, rose 5.7%, annualized. Clearly Federal Reserve leaders have failed to achieve any semblance of stable prices.
The Fed recently changed its policy approach from a 2% inflation target to a flexible average inflation target. It did so to make up for inflation running under 2% and to allow the economy to reach maximum employment before the Fed hiked the funds rate, its main policy lever.
At the time, this appeared to be a progressive approach to monetary policy as the Fed attempted to use aggregate monetary policy to help one segment of the population — low-income workers.
That was a non-starter and destined to fail since changes in monetary policy impact all segments of the economy, even though it impacts some sectors more than others.
The prior monetary approach of targeting 2% inflation worked. In 2018 CPI inflation was 2.4%, Personal Consumption Expenditures (PCE) inflation (the Fed’s preferred inflation measure) was 2.1% and the unemployment rate was 3.9%. The Fed had achieved full employment and stable prices under that system. And low-income workers enjoyed full employment and price stability.
But that was not progressive enough for Fed leaders.
A system was needed for Fed officials to be able to say explicitly that the monetary policy was targeting low-income workers. In a May 3, 2021 speech, Powell discussed the inequities and pains for low-income workers. He took a progressive approach of focusing on improving the lot of low-income workers by running a hot economy.
The result: high inflation and most Americans facing falling real wages.
President Biden reappointed Powell for another four years, even though Powell contributes to the president’s low poll numbers. Powell’s reappointment was his reward for his progressive positions.
Fed leaders will never admit they made a mistake by abandoning the prior system of a 2% inflation target. Instead, they may muck around with the revised system and say a target of 2% inflation is too low and a higher target rate of inflation is needed.
Everyone at the central bank seems to be afraid to take a strong position in support of maintaining the purchasing power of the dollar. Progressives apparently are in charge, favoring Modern Monetary Theory.
Powell could have started his bond-buying taper last March or April at the latest and been finished about now. Instead, the Fed kept pouring $120 billion/month of new liquidity onto an already hot economy and delayed starting the taper until last month. Quantitative Easing, before November, consisted of purchasing $80 billion of treasuries and $40 billion of mortgage backed securities (MBS) each month.
It adds up. The Fed has bought $1.2 trillion of MBS since February 2020. The housing market has been on fire this year. In April 2021 the Case-Shiller housing price index was already flying along at 15% year-over-year. Yet Fed leaders kept their foot to the floor and continued buying $40 billion of MBS a month. Now housing prices are climbing at nearly 20% year-over-year.
In terms of Treasuries the Fed bought over $3 trillion since February 2020. It was clear to everyone in March or April at the latest that the Fed needed to start tapering its massive purchases of both MBS and Treasuries, since the economy grew at over 6% in the first quarter of this year.
Worse still, inflation may remain elevated for another two years due to the lagged effects of the Fed’s huge $4.5 trillion increase in the quantity of money since February 2020.
In addition, the Biden administration pushed through a huge giveaway of taxpayer money earlier this year. President Biden signed the $1.9 trillion COVID relief bill on March 11, 2021, when additional giveaways were no longer needed since the economy was already booming. That added to demand and hiked inflation pressures even further as it pushed demand far above what the supply chain could deliver.
Fed Chair Powell and President Biden both deserve blame for the current inept economic policy. And Americans deserve better.
Mike Cosgrove, principal at Econoclast, a Dallas-based capital markets firm, is a professor at the University of Dallas.