Inflation is raging at a level not seen in 40 years and the Federal Reserve indicates it will … wait another month to do anything.
On Wednesday, we got minutes from last month’s meeting of the Federal Open Market Committee, which has a tremendous ability to tame inflation by hiking interest rates and selling off its $9 trillion balance sheet. The minutes hint that everything is on the table, but whatever it is its members plan on doing, it’s probably not going to be for a few more weeks — which leaves open a question: What are they waiting for? After all, the meeting came before the latest inflation report, which shows prices rose more than 7 percent, the fastest rate of increase since 1982.
I’ll spare you the jargon, but the key term sprinkled throughout the 20-page double-columned document is “faster pace.” As in, “It would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate.” The phrase appears six times throughout the minutes, a sign that, as early as last month, members of the Fed’s board of governors were feeling antsy about how to keep inflation under control. They say that they’re likely to sell off a “significant” portion of the Fed’s balance sheet, which has doubled in size since the start of the pandemic — a buying spree that was begun to keep the economy from continuing its fall off a cliff in the spring of 2020. What these minutes seem to not show is any interest in raising rates in between meetings, which means it’s probably going to be another month before the Fed actually goes and does anything.
Why the hurry up and wait? Essentially, Jerome Powell, the Fed chair, has committed the central bank to actually going out into the markets and buying up more debt through mid-March, even as inflation continues to rise. This is, in general, the opposite of what you’d want to do if you were trying to keep prices from rising further. The whole point of this drama around the Fed is that we are about to go from a period where credit is getting pumped into the system to one where it is getting drained out. Now, however, we’re in this murky wait-and-see interim, where we know it’s going to happen soon, and though in some cases — like that of mortgages — the cost of borrowing is already spiking, we’re just not quite there yet. Powell, however, is operating in the style of his last two predecessors by making no sudden movements. That’s all well and good for Wall Street’s portfolio managers, but it leaves the rest of us to play catch-up, while the Fed board could be forced to move faster and more aggressively than it would have if it had started pulling back earlier. “In markets, timing is everything, and the delayed reaction from the Fed has investors convinced that aggressive policy tightening is on the horizon,” Charlie Ripley, the senior investment strategist for Allianz Investment Management, wrote in a note.
Even before these minutes, it had become increasingly obvious that the Fed would move quickly once it started fighting inflation. Just two days before, James Bullard, the influential president of the St. Louis Federal Reserve, called for front-loading interest-rate hikes to bring inflation to heel, essentially announcing in March that the shock to the system was going to be a little more severe than what it might have been if it had started earlier.
There’s really no telling how things are going to play out once the Fed begins raising rates and selling off debt. The last time the central bank started to tighten the economy, in 2015, inflation wasn’t a threat, and the FOMC ended up proceeding slower than it had originally anticipated. Even with the unemployment rate at 4 percent, the pandemic is still keeping millions of people out of the workforce for child-care and health reasons — and those people are the most vulnerable to turnarounds in the economy. It’s a real concern that the economy might actually be more fragile than it appears and that a spike in interest payments will put more people out of work. Last week, Goldman Sachs economist Jan Hatzius released research noting that the trade-offs for dealing with inflation are far from balanced: It shows that if unemployment were to increase by 2 percent — a scenario that would likely tip the economy into a recession — that would only shave about 0.2 to 0.4 percentage points off inflation. While new COVID variants aren’t likely to have a big impact on the economy — Omicron was hardly a blip, if you look at consumption or hiring — the real risk is that the economy will stall out with prices still rising: the dreaded return of ’70s-style stagflation. If that happens, it’s unclear what the Fed could do to get us out of it.