Policy Has Tightened a Lot. Is It Enough?
Kashkari asks Policy Has Tightened a Lot. Is It Enough?
While the FOMC has now raised the funds rate by 75 basis points over the past two meetings (to 75 to 100 basis points), inflation has climbed rapidly over the course of the past year.
Some observers argue the Fed is way behind the curve because inflation has climbed faster than we have raised rates.
Is this criticism right?
You can stop right there and start laughing because Kashkari is clearly delusional.
Kashkari then goes on brag about forward guidance,
We are seeing the power of forward guidance: the FOMC has signaled where policy is headed in the future and markets have adjusted in anticipation of those policy moves, including both expected increases in the funds rate and decreases in the balance sheet. Because the FOMC has strong credibility with market participants, they take our forward guidance seriously, as they should.
The FOMC has made a dramatic pivot in the overall stance of policy over the past several months. Forward guidance and the committee’s strong credibility with market participants have resulted in a withdrawal of monetary stimulus even faster than we added it in the spring of 2020.
Strong Credibility? Fast Withdrawal of Stimulus?
Please be serious.
The Fed kept QE going all the way to March of 2022!
Despite inflation roaring for 18 months the Fed sat on its ass doing nothing but telling us inflation was transitory.
But somehow the Fed was not behind the curve.
Blaming the War
Unfortunately, the news from the war in Ukraine and the COVID lockdowns in China are likely delaying any normalizing of supply chains. If supply constraints unwind quickly, we might only need to take policy back to neutral or go modestly above it to bring inflation back down. If they don’t unwind quickly or if the economy really is in a higher-pressure equilibrium, then we will likely have to push long-term real rates to a contractionary stance to bring supply and demand into balance. The incoming data over the next several months should provide some clarity on these questions.
Despite reckless QE, massive inflation, and enormous stock market bubbles, Kashkari proposes getting back to neutral may be enough.
But Where is Neutral?
In the only thing Kashkari stated that made any sense, he admitted he does not know.
He thinks it's 2.0 percent but noted other Fed members think it's 3.0%.
That's quite a discrepancy.
The Fed Searches For the Neutral Interest Rate, Where the Heck Is It?
For discussion of neutral please see The Fed Searches For the Neutral Interest Rate, Where the Heck Is It?
Stocks, Gold, Oil, Rip Higher as Dovish Powell Wins Hoot of the Day Award
In case you missed it, please see Stocks, Gold, Oil, Rip Higher as Dovish Powell Wins Hoot of the Day Award
Just one day later, I commented Bond Massacre Continues and the Fed Dove Rally Fails Already
In short, the entire Fed is swinging from the vines like George of the Jungle, with no idea where the trees are and certainly no idea what inflation is.
This post originated at MishTalk.Com.
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