Contrary to a good number of analysts, I don’t think the Fed’s current response to inflation is anywhere near excessive. Four 75-basis-point increases in the Fed funds rate so far have not made any noticeable dent in what is the nation’s worst inflation in 40 years. I get the idea of a lag, but I suspect that a lot of people who are now worrying about a “hawkish” Fed have distorted views of what “normal” looks like. Such a distortion is perhaps understandable after years of the Fed’s policy of near 0 percent interest rates. It seems to me, though, that at the current level, we are barely getting back into the sanity zone even though market players who got high on the ultra-low rates so long dispensed by the Fed aren’t enjoying today’s withdrawal, however mild it might currently be.
But then there is also the fact that it was always going to be harder for Chairman Powell than it was for Chairman Volcker (not that the latter had a walk in the park). In 1980, outstanding public debt was only around 30 percent of annual GDP. And there was no war; globalization was on the rise, women were entering the workforce at higher rates; airlines, trucking, energy, and financial services were being deregulated — all of which greatly increased supply.
No such environment exists today. We now have 120 percent debt to GDP, deglobalization, crackdowns on immigration and energy production, and no supply-expanding deregulation. On the contrary, when it comes to the last item on that list, with brief exceptions, over the past several decades we have seen a heaping-on of regulatory nonsense that strangles the economy and entrepreneurs daily. As if this were not bad enough, we have an administration that won’t stop pouring fiscal fuel on the inflation fire. Powell has a tough job ahead of him.
That said, I don’t feel too sorry for Powell, who oversaw the biggest Fed failure of the last 40 years. (Where, by the way, are the free-market scholars courageously explaining the need to radically overhaul the Fed?) I nevertheless do feel some sympathy for him, because he must now contend with a bunch of people who are upset to discover that reining in enormously rapid inflation is painful.