Along with President Joe Biden and Congress, the Federal Reserve has a responsibility to manage inflation, a job it was established to do. And just like Biden and Congress, the Fed has failed at its job.
At the Fed’s own website, it states clearly what its primary job is, by law: “Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.”
Well, today, we have neither “full employment” nor “stable prices.” On Tuesday, the government reported that wholesale prices, that is prices just a step before retail, surged 10% in February.
As bad as that number was, it didn’t include the huge jump in energy prices following Russia’s invasion of Ukraine. Consumer prices rose “only” 7.9% in February. So expect them to go even higher next month.
This inflation came thanks mostly to absurd policies – paying people to stay home while spending trillions of dollars of “stimulus” on federal programs not related to COVID – pursued by the Democrats who control both Congress and the White House.
Even some Biden political supporters say it’s the Democrats’ fault, not “Putin’s price hikes” or “COVID,” or “corporate greed.”
Indeed, former Obama administration economists Larry Summers and Steven Ratner have both said that, contrary to all the finger-pointing, Biden and Congress are to blame for the current inflation.
“This is a consequence, fundamentally, of an overheated economy,” Summers said Friday, after more bad news on inflation.
Massive government spending, totaling $6 trillion at last count, plus another $1.5 trillion planned this year. Enormous debt, $30 trillion-plus. An avoidable supply-chain collapse. Cancellation of the Keystone XL pipeline and the re-regulation of the oil industry. Not to mention, reckless money printing.
These are all the causes of the inflation. They’re what is called in soccer an “own goal.” We did it to ourselves.
While the Biden administration and its Democratic allies may have caused this inflation with fiscal policy, that doesn’t excuse the Fed’s monetary policy under Chairman Jerome Powell. The Fed’s job always is to ensure that inflation doesn’t become entrenched.
For much of last year, we heard that rising inflation was “transient.” In fact, it’s here and getting worse, eroding Americans’ buying power and standard of living. One recent estimate put basic consumer costs for the average family up at least $5,293 since 2020.
Yet, the Fed stood back and watched as inflation caught fire, confident that more than a decade of near-zero interest rates would have little impact on inflation. Now it has a full-scale conflagration on its hands.
We’ve quoted Milton Friedman’s dictum here before that “inflation is always and everywhere a monetary phenomenon.” It’s not just a slogan; it’s a fact.
If you haven’t seen it before, give the chart above a good look. It’s not a misprint. As you can see, more than 80% of all the money in circulation has been created since the start of 2020. That’s an astounding, and frightening, fact. This was when inflation’s seeds were sown.
It happened because the Fed jacked up money supply while keeping interest rates near their all-time lows, despite our “recession” being entirely imposed on us by an act of Congress. When the COVID pandemic hit, the Democrats decided to take the economy off-line and spend money like there was no tomorrow.
The Fed should have stepped in, raising rates and pulling back on its purchases of trillions of dollars in government bonds to rein in the insane monetary growth. It didn’t.
Now we’re paying the price. A Fed interest rate hike of a quarter point or even half a point will hurt consumers. Every interest bearing loan they have, from credit cards to mortgages and everything in between, will be more expensive.
With inflation already at 8% and going higher, Fed interest rates below 1% will do little. It’s like shooting a charging elephant with a Daisy BB gun.
We’re now seeing headlines such as this one in the Wall Street Journal, which suggests the Federal Reserve knows it missed the boat: “Fed Wrestles With the Challenge of How Quickly to Raise Interest Rates.”
Yes, there’s a lively debate within the central bank about whether a quarter point is enough, given the speedy onset of inflation. Why not a half-point? And how many increases, and how fast?
These are all legitimate questions. But they also show that the Fed didn’t move fast enough when it should have to head off inflation’s big jump.
No doubt, during this politically divided time, monetary policymakers don’t have the stomach for a prolonged political battle over interest rates. The Fed’s job isn’t to do politicians’ bidding, but to do the right thing. And because it didn’t do so earlier, Americans today are suffering the pangs of soaring inflation.
That’s bad news for the Biden Democrats in November’s election, who now look headed for an epic defeat. If so, it’s equally bad news for the Fed, which will no doubt face hostile hearings from a new Republican Congress next year. The time to act is now.
— Written by the I&I Editorial Board