A growing number of people on both the right and left are calling for the Fed to change course, or at least to slow down on raising interest rates, because the result could be an unnecessary recession.
The timing of these demands is weird since it looks like inflation is actually persisting and, indeed, even strengthening. Here’s Jason Furman writing recently in the WSJ:
In the past three months the Fed’s preferred price index measure, core personal-consumption expenditures or PCE, has risen at a 5% annual rate. More troubling, this rate was held down by volatile technical factors like the large decline in the imputed price of investment advice, a component of the index even though no one actually pays it, that resulted from declining asset values. The more reliable median PCE price index grew at a 6.9% annual rate over that same time. Both of these are higher than where they were when Chairman Jerome Powell made his first pivot in November 2021.
But what is truly strange is that so many people are apparently still under the impression that inflation can be tamed without the economy slowing down and the unemployment rate going up. I have never been one to believe in the Fed’s ability to manage a soft landing — the question, in my opinion, was always how harsh a landing it will be — precisely because the tools that the Fed has at its disposal to tame inflation will slow down the economy.
The Furman piece offers many good arguments for why the Fed must stay the course.
Here is something I am not surprised about: the economic geniuses at the U.N. are also among those calling for central banks to stop their efforts to control inflation.
“Today we need to warn that we may be on the edge of a policy-induced global recession,” Secretary-General of UNCTAD Rebeca Grynspan said in a statement. “We still have time to step back from the edge of recession. Nothing is inevitable. We must change course.”
The U.N. offers “pragmatic” solutions:
“We call then for a more pragmatic policy mix that deploys strategic price controls, windfall taxes, anti-trust measures and tighter regulations on commodity speculation. I repeat, a more pragmatic policy mix . . . we also need to make greater efforts to end commodity price speculation.”
We are told that this is supposed to help address “supply-side issues in trade, energy and food markets.” It would be extremely funny if it wasn’t so sad. Price controls, antitrust, and more regulations leveled at speculators cannot control inflation (although they might mask it); what’s more, by exacerbating supply constraints, these interventions will only make matters worse.
It also drives me nuts that the U.N. then goes on to complain about how rising interest rates and the strong dollar are creating debt distress around the world. I assume we will soon hear some of these same complaints about growing interest rates creating fiscal pressure in the U.S. The truth is that fiscal irresponsibility and excessive debt accumulation are to blame for the debt distress many countries are already facing and will continue to face. The whole point of being prudent and fiscally responsible during good times is precisely to be better able to face crises.
The U.N. is looking for scapegoats (high interest rates, speculators, and monopolists) rather than facing the true villains: bad monetary and fiscal policies.