And the agency’s latest decision was perfectly sensible.
And the agency's decision today was perfectly sensible.
T he Fed’s 25-basis-point increase today is being roundly criticized in some quarters. Many thought that the Fed would pause given the recent turmoil in the banking sector, with some even arguing that the Fed should cut rates.
Amidst all the hubbub over the stresses facing America’s banks, and the bailouts being administered by U.S. regulators, it would be easy to excuse someone for having lost track of what has been going on with inflation. Thank goodness the Fed has not.
Let’s take a look at the numbers that undoubtedly convinced the Fed to stay tough. Do you remember last year, when everyone started to recognize that inflation was spinning out of control? In many ways, despite all of the Fed’s tightening since, things look as bad or even worse today.
It is true that the core consumer price index (CPI) declined from an annual increase of 6.4 percent to 5.5 percent from February 2022 to this February. This is still far away from the Fed’s target of 2 percent, but it looks at least a little bit like progress. The problem is that measures that better estimate the underlying inflationary forces of the economy have mostly gotten worse. For example, median CPI increased from February 2021 to February 2022 by 4.8 percent. For the latest year, it increased a whopping 7.2 percent. A look at the median price, of course, tells you what the price of the typical good is doing and is probably the measure best correlated with what consumers are actually experiencing in their lives.
An alternative measure that has been getting a great deal of attention is the “super core” measure of inflation. This strips out the very sticky housing services and rent components of core inflation. This measure was about 4 percent at the beginning of 2022. It is about 6 percent now. Inflation, also, is a global phenomenon. The latest euro-zone number shows prices increasing by 8.5 percent.
Which makes what the Fed decided to do today absolutely sensible. In a television interview earlier this week, I was asked what I would do if I were at the Fed. My response is that I would increase the target rate by 25 basis points but change the forward-looking language to make it less obvious whether more rate hikes were imminent. That would show markets that the Fed is still on the ball, but give markets a little cause for optimism relative to a few weeks ago.
In the Fed’s statement, not many words changed. But for the future, the language change is just what the doctor ordered. Previously, the Fed promised “ongoing” increases in the target range. Now, the Fed promises that “some additional policy firming may be appropriate.”
It is a shame that so many people doubted that the Fed would stand tough in the face of the recent banking turbulence. The fact is, however, that Jay Powell understands that inflation got out of control in the 1970s because the Fed reversed course every time things looked a little shaky. Before we knew it, inflation was in the double digits. There is strong reason to believe, especially after today, that on the inflation front the Fed can be credibly relied upon.
That doesn’t mean that the reassuring language in the statement will make much difference. Inflation is way too high, has responded way too little to policy so far, and so rate hikes will have to continue.
Joachim Nagel, the distinguished and feisty Bundesbank president, said it best in an interview with the Financial Times just before the Fed action: “There’s certainly no mistaking that price pressures are strong and broad-based across the economy,” Nagel said of the euro zone. “If we are to tame this stubborn inflation, we will have to be even more stubborn.”