Fed Now Says It Should Have Acted Sooner on Inflation

[luckydude]

The Fed now says that it should have acted sooner to fight inflation:

https://finance.yahoo.com/news/fed-chairman-powell-we-should-have-moved-earlier-211146680.html

The year-over-year inflation rate has been rising since April 2021, and yet it has taken the Fed nearly a year to figure out that inflation isn't transitory.

Jan 1, 2022 7.48%
Dec 1, 2021 7.04%
Nov 1, 2021 6.81%
Oct 1, 2021 6.22%
Sep 1, 2021 5.39%
Aug 1, 2021 5.25%
Jul 1, 2021 5.37%
Jun 1, 2021 5.39%
May 1, 2021 4.99%
Apr 1, 2021 4.16%

These guys are geniuses.

 

[plex]

They are expecting next month to be a similar jump, the prediction is between 7.8-7.9%. Since a few months ago, it has become pretty clear that these ~0.5% bumps every month will continue until the Fed stops its previous course. Based on the past, it takes years for drastically increased rates and QT to return inflation to a reasonable level (or a very bad recession), the small increases they have planned will likely make the situation similar to the early 70's, where the Fed dragged their feet on raising rates until things got so bad that we needed a Volcker. I don't think the Fed is in a position to take the same path as Volcker, the more likely path is for them to encourage a severe recession to occur.

 

[njhowie]

They should not have been waiting to see inflation numbers moving at/above their "target" rate of 2%. They should have followed through in 2019 with the 3 hikes they promised and not the 1 and then revert when market panicked. Even before then when the market was taking off and earnings were coming in strong...maybe 2015 or 2017. Rates were taken to zero to provide support for a weak economy. That weakness had dissipated long ago and yet we received conflicting propaganda. Out of one side of the mouth, we'd get a constant stream of news about how the economy was doing so well, while out of the other side we'd get a story of continued weakness. Corporate profits and the stock market taking off should have been enough.

The market was strong, labor market was strong (at/above full employment for years), economy was strong. The Fed's job is to prick the bubble and take the punch bowl away when things get too frothy, and they had been for a long time. Many folks were saying this here and elsewhere.

Generating inflation is not one of the mandates of the Fed.

 

[bada bing]

Generating inflation is not one of the mandates of the Fed.

You sure ?
USA official national debt is $30T + and growing. The Fed can't raise the interest on that very much without upsetting the apple cart. Strong dollar doesn't do much for you if you are up to your eyeballs in dollar denominated debt.

The hidden tax of inflation is really the only way to get it back in control - if that would even work.

 

[CharlieZulu]

After years of studying Economics...one of the things I learned, when it comes to the Fed, their actions will always be either not enough or too much...and always too late.

Centralized government control of any economy, will never be able to outsmart the free market. The Fed is only making worse the conditions created over the last 2 years by well-meaning, but ill-informed people.

 

[Montecfo]

Hindsight is always 20:20. I don't recall many of us demanding the FED act a year ago.

But this inflation was kicked off by supply chain issues and massive government overspend. Fed largesse and deficit spending alone had not proven inflationary over the past decade plus

So I think the reticence was understandable.

Also, this bought of inflation is not similar to the 1970s. But here is one similarity: It can be hard to stop once it gains a foothold. But we have clear buttons to push: End Fed largesse, reduce deficit spending, relax restrictions.

Whether government will press the right ones seems unlikely but I remain hopeful.

 

[njhowie]

You sure ?
USA official national debt is $30T + and growing. The Fed can't raise the interest on that very much without upsetting the apple cart. Strong dollar doesn't do much for you if you are up to your eyeballs in dollar denominated debt.

The hidden tax of inflation is really the only way to get it back in control - if that would even work.

Yes I'm sure. The US has a very big spending problem, which has led to where we are today. A few years of pain and austerity is very likely what we need to get back in control.

Not upsetting the apple cart is not the Fed's mandate either. Again - it IS the Fed's job to take the punch bowl away.

When asked directly, Powell said to Congress that the Fed would do what is necessary to get inflation under control even if that means "upsetting the apple cart".

 

[njhowie]

After years of studying Economics...one of the things I learned, when it comes to the Fed, their actions will always be either not enough or too much...and always too late.

Centralized government control of any economy, will never be able to outsmart the free market. The Fed is only making worse the conditions created over the last 2 years by well-meaning, but ill-informed people.

Absolutely correct. We just need to go back to Greenspan's final year or two to see how that plays out.

 

[razztazz]

After years of studying Economics...one of the things I learned, when it comes to the Fed, their actions will always be either not enough or too much...and always too late.

Centralized government control of any economy, will never be able to outsmart the free market. The Fed is only making worse the conditions created over the last 2 years by well-meaning, but ill-informed people.

As if anything anyone does must always be and can only be on time, and just enough and exactly right in every way at every moment. HA! Not even the private sector can do that nor are they interested in doing it. So they fail too.
Just think how bad things would be without them and just leave everything up to a bunch of business entities going their own way? Nothing could ever go wrong with that?

Keep in mind that those marketplacers own the Fed. Everything gov does is at the behest of the private sector. We hear that complaint too whenever it's convenient. "Gov is bought". Gee, why would they use their speech/money to buy it? Now? The Fed/Gov is somehow made of anti-matter.

 

[conversationalphrase]

The Fed is backed into a corner with no good way out. Although much of the blame lays on them for bad policy (continuing to buy MBS (mortgage backed securities), buying corporate bonds keeping zombie companies alive, and waiting way too long to raise the Fed funds rate), the bigger problem is fiscal policy which the Fed does not control. When the gov't dumps 42% of the annual GDP directly into the hands of its citizens resulting in massive inflation and demand spikes, the Fed, and it's unconfirmed chairman Jay Powell, can't effectively respond.



The Fed needs to significantly raise rates now, take the hit in equities and get it over with.

 

[38Chevy454]

The Fed now says that it should have acted sooner to fight inflation

This is painfully obvious to everybody, and the only new thing here is the gov't admitting it. Anyone buying food, gas, supplies, has felt the price increases.

I do agree about inflation really being the only way for the US to reduce the debt load without direct tax increases. Inflation is a tax increase, just hidden as previous replies have stated. This may be a harsh sounding statement, but at least inflation is paid by all, rather than the typical "tax the rich" solutions that seem to always come out of gov't.

 

[GenXguy]

Inflation isn't "hidden" at all. Not even close.

Not only does it devalue my wages, but for those of us who have a lot of savings, it is devaluing all the past money we have already earned and saved, which is even worse. And with CD's paying .6% or less, and with stocks dropping (and forget bonds), as inflation continues to increase, things are only getting worse.

Even if the FED can reduce inflation in a few years, that does NOT mean that prices will come back down. Prices will continue to increase from the current high prices, but they just won't increase as fast as they are now. All your savings will buy less.

I knew where all the excessive unemployment bonuses/tax credits/stimulus along with interest rate cuts were going to take us. And here we are.

 

[copyright1997reloaded]

Hindsight is always 20:20. I don't recall many of us demanding the FED act a year ago.

https://www.early-retirement.org/forums/f52/modern-monetary-theory-non-political-107850-2.html#post2559040

https://www.early-retirement.org/forums/f27/inflation-107763-2.html#post2556440

https://www.early-retirement.org/forums/f44/chart-of-the-day-94519-12.html#post2538609
Note; FCX is now $50.11

https://www.early-retirement.org/forums/f44/inflation-protection-103284-2.html#post2413219

and most importantly: https://www.early-retirement.org/forums/f28/considering-a-fixed-lifetime-annuity-103215.html#post2409258

MY biggest fear isn't the stock market collapsing. The federal government (Treasury) and Federal Reserve have already shown that they will do EVERYTHING necessary to keep that from happening, including Thursdays announcement where the Federal Reserve will be buying ET's and effectively junk bonds. My biggest fear is that my accumulated wealth's buying power will be severely damaged from inflation.
...
So, the federal reserve of today has seen that lesson from the past and will not repeat it. They've seen their ability to prop up financial assets in the 2008/9 recession - and if some stimulus is good then a bunch must be much better. (And so they might overshoot and cause a different problem.)

To each their own in terms of investments - but from my perspective I am looking more and more at trying to hedge for down the road inflation. I already own a decent slug of TIPS and IBonds, but have recently started looking at adding to precious metals.

 

[foxfirev5]

Yes I'm sure. The US has a very big spending problem, which has led to where we are today. A few years of pain and austerity is very likely what we need to get back in control.

Not upsetting the apple cart is not the Fed's mandate either. Again - it IS the Fed's job to take the punch bowl away.

When asked directly, Powell said to Congress that the Fed would do what is necessary to get inflation under control even if that means "upsetting the apple cart".

Yeah but does he have the guts to do it? I honestly feel that the ugly politics of the times creep into the Fed's mandate. Evidence as recently as 2018.

 

[gcgang]

Fed MUST maintain these negative real rates or our government would go broke paying interest.

My 25% cash never hurt so bad, earning <1% while prices zoom. Yuck.

 

[RobLJ]

If y'all think the Fed was too late and that it will act quickly in the way you think they should act.............then you probably should reduce your stock allocations.

Just saying. Given the demographics, I think inflation will slowly subside, although it is going to take a year or two. In the meantime, it will exact pain. COVID, logistics, and now the Russian War (oil/gas and trade) will continue to be inflationary for a while.

 

[GenXguy]

If y'all think the Fed was too late and that it will act quickly in the way you think they should act.............then you probably should reduce your stock allocations.

Just saying. Given the demographics, I think inflation will slowly subside, although it is going to take a year or two. In the meantime, it will exact pain. COVID, logistics, and now the Russian War (oil/gas and trade) will continue to be inflationary for a while.

Very slowly subside, probably at least few years to get back to a target level.

But as I said, EVEN THEN, even if the FED can reduce inflation in a few years (if inflation "subsides" as you say), that does NOT mean that prices will come back down. Prices will continue to increase from the current high prices, but they just won't increase as fast as they are now. All your savings will buy less. The pain will continue. And with stocks being overvalued and interest rate hikes coming, you can't expect much relief from your investments.

 

[BeachOrCity]

Hindsight is always 20:20. I don't recall many of us demanding the FED act a year ago.

But this inflation was kicked off by supply chain issues and massive government overspend. Fed largesse and deficit spending alone had not proven inflationary over the past decade plus

So I think the reticence was understandable.

Also, this bought of inflation is not similar to the 1970s. But here is one similarity: It can be hard to stop once it gains a foothold. But we have clear buttons to push: End Fed largesse, reduce deficit spending, relax restrictions.

Whether government will press the right ones seems unlikely but I remain hopeful.

It was pretty obvious to me and many others by 3q/4q 2020 (not 2021) that the MBS buying was lighting housing on fire by suppressing rates and was not needed.

So, I disagree that this is something 'new' people are complaining about.

 

[Montecfo]

https://www.early-retirement.org/forums/f52/modern-monetary-theory-non-political-107850-2.html#post2559040

https://www.early-retirement.org/forums/f27/inflation-107763-2.html#post2556440

https://www.early-retirement.org/forums/f44/chart-of-the-day-94519-12.html#post2538609
Note; FCX is now $50.11

https://www.early-retirement.org/forums/f44/inflation-protection-103284-2.html#post2413219

and most importantly: https://www.early-retirement.org/forums/f28/considering-a-fixed-lifetime-annuity-103215.html#post2409258

"Hindsight is always 20:20. I don't recall many of us demanding FED action a year ago."

Clearly that does not mean no one was.

I do recall some folks (not saying you) calling for higher interest rates for CDs and similar investments, while seeming to miss the effect on their equity portfolios which would necessarily follow.

The FED always seems to undershoot or overshoot. I think economic targets are just hard to hit when the relationship between regulation and market response is not immediate or direct (which is true in most cases).

I also think it's now easy to forget how negatively markets have respond to rate hikes in recent years.

 

[Montecfo]

It was pretty obvious to me and many others by 3q/4q 2020 (not 2021) that the MBS buying was lighting housing on fire by suppressing rates and was not needed.

So, I disagree that this is something 'new' people are complaining about.

We will never know what was necessary since there is no control case.

But I recall similar voices in 2009 being sure massive inflation would be driven by low rates and stimulus. This of course never happened.

And I am not saying it is completely new. I'm saying most folks were happy economic disaster was averted and that stocks quickly recovered.

 

[Markola]

In the 80s, inflation reached 14% before the Paul Volcker Fed raised rates to 20% to break it, causing a brief recession. Today, at 7.5% inflation, the equivalent interest rate to succeed would be 10%.

Everyone ready for that? (Didn’t think so.)

 

[Car-Guy]

The Fed now says that it should have acted sooner to fight inflation:

Yes

These guys are geniuses.

No

 

[Turbo29]

We will never know what was necessary since there is no control case.

But I recall similar voices in 2009 being sure massive inflation would be driven by low rates and stimulus. This of course never happened.

And I am not saying it is completely new. I'm saying most folks were happy economic disaster was averted and that stocks quickly recovered.

In 2009 businesses weren't forcibly shut down by the government while money was handed out to everyone.

 

[Born2Fish]

"Hindsight is always 20:20. I don't recall many of us demanding FED action a year ago."

Clearly that does not mean no one was.

I do recall some folks (not saying you) calling for higher interest rates for CDs and similar investments, while seeming to miss the effect on their equity portfolios which would necessarily follow.

The FED always seems to undershoot or overshoot. I think economic targets are just hard to hit when the relationship between regulation and market response is not immediate or direct (which is true in most cases).

I also think it's now easy to forget how negatively markets have respond to rate hikes in recent years.

I agree. There is a dominant deadtime (the time it takes after making a change until you first begin seeing a response change in the inflation variable) and lag (the slope of the inflation rate vs. time as it either rises or falls after the dead time is reached) between when the Fed raises or lowers rates and the impact on inflation reaches steady state.

And this process is continuous. Other variables are constantly impacting the eventual outcome even as the Fed is making adjustments based on the previous feedback data.

It would be like riding a bicycle which, when you turn the handle bar, it takes 6 minutes before the wheel begins to start turning, and the amount that the wheel eventually turns is twice as much as you turn the wheel. There would be a lot of crashes during the learning curve of the steering process dynamics.

 

[GenXguy]

In the 80s, inflation reached 14% before the Paul Volcker Fed raised rates to 20% to break it, causing a brief recession. Today, at 7.5% inflation, the equivalent interest rate to succeed would be 10%.

Everyone ready for that? (Didn’t think so.)

Real inflation is probably higher than 14%. I've estimated it to be 15% to 20% for me, with no change in consumption, just due to higher costs/prices. And it's expected to increase from here.