Opinion: The Fed must boost rates by a full percentage point at every meeting to bring down inflation and avoid a job-killing recession

The Fed has taken aim at inflation, but it isn’t moving fast enough.

Earlier this month the Fed boosted the federal funds rate by half a point, and more half and quarter point increases are almost certain over the remainder of the year.

In June, it will start running down the nearly $5 trillion in Treasury, mortgage-backed and other securities that it purchased by printing money to finance pandemic relief.

Now read this: Even a recession wouldn’t cure inflation, former Obama adviser Jason Furman says

Powell dallying

Fed Chairman Jerome Powell dallied as labor markets overheated and told us all the money he was printing didn’t matter. Now, he believes he can bring down inflation without inflicting too much unemployment.  

A recession is becoming increasingly likely but the longer we wait, the tougher will be the medicine when we face it.

Too much money is chasing too few goods—households and nonprofits have about $3 trillion more in their checking accounts than before the pandemic. To mop up that and other excess liquidity on business and other balance sheets would take perhaps four years at the pace the Fed expects to sell Treasury and mortgage-backed securities.

We face the danger that Powell will bend to White House pressure to help re-elect President Joe Biden, as Chairman Arthur Burns did for President Richard Nixon and ultimately unleashed double-digit inflation. 

Structural problems

Recent policy missteps aside, structural problems will make the coming decade much tougher in both the United States and Europe than the historic period of mild inflationary pressures of the prepandemic years.

The U.S. and broader NATO strategy of trying to not antagonize President Vladimir Putin into a nuclear or chemical escalation of the war in Ukraine—including not providing Kyiv with jet fighters to provide air cover and weapons to strike military and infrastructure targets in Russia—likely means a stalemate.

Russian and Ukrainian exports of agricultural commodities
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 fertilizer, oil
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and gas
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and metals will be significantly impaired for years. Other sources of supply can be developed but those will take several years and be more costly.

Farmers face higher diesel and fertilizer costs, food inflation will persist and shortages of other critical materials—for example, nickel to help in the transition to green energy—will be exacerbated.

Shortages and delays

Accelerating the shift to green power and electric vehicles is creating shortages of lithium and other metals necessary to build batteries, motors and transmission lines.

It can take up to 10 years to permit and build new mines. Getting high-tension lines approved to bring electricity from where the sun shines or hydropower is abundant to where folks need electricity is similarly difficult.

Even before Russia invaded Ukraine, global supply chains were not expected to heal this year. Thanks to just-in-time manufacturing and international wage arbitrage, complex manufacturing systems that stretch to China and elsewhere in Asia are proving inflexible and predisposed to shortages.

According to Kastle, office occupancy rates remain about half of prepandemic levels. Adjustments in the use of commercial buildings—for example, downsizing office footprints and converting those to alternative uses—and the continued build-out of home workspaces will be costly.

Even with sales declining, home prices are rising 20% a year, because tough zoning and building codes make new construction too expensive within reasonable distances from city centers. Mortgage rates zoomed past 5% in anticipation of Fed tightening but at the current pace of inflation, mortgage rates will have to jump closer to 10% to reasonably align demand with supply.

War on oil

China’s zero COVID policy delayed but did not avoid slower growth and factory shutdowns. Whereas during our pandemic it was tough to get the goods made in China to America, now with COVID plaguing Shanghai, Chinese plants aren’t always making the goods.

Biden continues his war on oil and gas by slashing the federal lands eligible for leasing some 80%, jacking royalty charges 50%, and imposing tougher environmental regulations on drillers.

Even the hawks among Fed officials place the neutral federal funds rate that will neither overheat nor slow the economy at about 2.5%. That’s far too low and only about half of what needs to be done.

To get inflation to 2%, the Fed should raise the federal funds rate at each meeting—approximately every six weeks—a full percentage point. Through the sale of Treasury and mortgage-backed securities, it should similarly push up the 10-year Treasury rate
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.

A recession is becoming increasingly likely but the longer we wait, the tougher will be the medicine when we face it.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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Source: https://www.marketwatch.com/story/the-fed-must-boost-rates-by-a-full-percentage-point-at-every-meeting-to-bring-down-inflation-and-avoid-a-job-killing-recession-11653405862?siteid=yhoof2&yptr=yahoo