Fed Chair Jerome Powell and the FOMC yesterday raised the fed funds rate by another 75 bps to 3.75-4.0%. Markets gave back most of October’s gains fairly quickly.
I’m turning it over slowly in my mind, trying to gauge their thoughts here. I’m not sure what models they use, what data they think is most important, what impact their actions will have, and perhaps most importantly, what exactly they hope to achieve.
I direct your attention to the chart of CPI and Fed Funds Rate above.
I don’t care what your personal theories on monetary policy may be, your thoughts on Milton Friedman, or who you plan to vote for next week. Instead, I challenge anyone to look at that chart and tell me that this crew has the slightest idea WTF they’re doing.
In March 2001, the CPI ticked the Fed’s 2% inflation target, and they had a reaction. . . Nothing they remain at an emergency level of zero. A few months later, the CPI was above 4%; By June, it was over 5%, by October, over 6%, and they finished 2021 with a CPI over 7%. And yet, cricket. It wasn’t until March 2022, 2 years after the pandemic panic, that the FOMC saw fit to begin raising rates.
The conclusion that bothers me is that the same Fed that was too late to recognize that inflation was speaking is now too late to recognize that it has peaked and reversed. The results could include job losses, declining home values, reduced consumer spending, and possibly a painful recession.
in the past:
When Your Only Tool Is a Hammer (November 1, 2022)
How the Fed Causes (Model) Inflation (October 25, 2022)
Why is the Fed always late to the party? (October 7, 2022)
Who’s to Blame for Inflation, 1-15 (June 28, 2022)
How Everyone Miscalculated Housing Demand (July 29, 2021)
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