The Fed Is Making Things Up as It Goes Along
The Federal Reserve would like you to think that it is scientifically guiding the economy with carefully calculated monetary policy.
The truth is the Fed is making things up as it goes along.
As Mises Institute senior editor Ryan McMaken noted in a recent article, Federal Reserve Chairman Jerome Powell has admitted that the central bank doesn’t know what it will do in 2023. And if you look at the herky-jerky path we’ve been on the last few years, it should be clear it hasn’t had a clue the entire time.
As Peter Schiff put it in a recent podcast, the Fed is oblivious.
They still think that we have a robust economy. They still think that inflation can be brought under control and that everything is going to be fine. … They are completely oblivious to the disaster that they have created in the same way that they were completely oblivious to the 2008 financial crisis even in the summer of 2008 when the crisis was just around the corner. They have no clue that what they’ve been looking at is just the mother of all bubbles.”
At the December FOMC meeting, the Fed slowed its roll slightly, hiking rates by 50 basis points. That pushed the federal funds rate to 4.5%. The last time rates were this high was in 2007.
While the pace of rate hikes appears to be slowing, Powell maintained a hawkish tone, saying, “My view and my colleagues’ view is that this will take some time. We have a long ways to go to get back to price stability.”
But McMaken raised a poignant question: what exactly does “a long way to go” mean? That is rather subjective. But we can get a sense of what the Fed is thinking by looking at its Summary of Economic Projections. McMaken sums it up.
Most members of the committee believe the target policy rate will peak at 5.5 percent or less in 2023 and then fall back below 5 percent by 2024. In other words, most on the FOMC believe only two more hikes of 50 basis points are going to be “needed”—at most—and the FOMC would then get back to cutting the target rate yet again by mid-2023. So, while Powell’s tone was undoubtedly hawkish, the Committee gave many reasons to look for a return to Fed easing just a few months away.”
A lot of people in the mainstream aren’t buying what the Fed is selling. One economist told Bloomberg that “the market is not buying the Fed’s increasingly hawkish position that they are going to raise rates to a higher-than-expected level and keep them there.”
The market clearly thinks inflation is going to be on a much more desirable path than the Fed is anticipating.”
Market skepticism is based on the growing anticipation of a recession. Most people don’t believe the central bank will keep hiking as the economy tanks. This is a rational position given that the Fed has historically rushed in to prop up a sagging economy. Why should we expect anything different this time around?
Powell keeps pointing to a “strong” labor market to justify his view that a soft landing is still possible. Of course, when you dig more deeply into the data, it becomes clear that the labor market isn’t nearly as robust as advertised. The government job numbers simply don’t add up.
And as McMaken pointed out, employment is a lagging indicator.
But, there’s no reason to expect to see rising unemployment in the early phase of a Fed tightening cycle. History shows that rising unemployment tends to come months after the Fed ends its tightening and reverts to a loosening cycle. We can see this in the delays between peaking fed fund rates and peaking unemployment rates. For example, in the leadup to the recession in the early 1990s, the federal funds rate started going down again in June 1989. But unemployment did not peak until the summer of 1992. Similarly, the federal funds rate began to fall in late 2000, but unemployment in the dot-com bust did not peak until the summer of 2003.”
Despite his self-assured demeanor, Powell admitted that he doesn’t know whether the economy will dip into a recession or not.
I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not. It’s not knowable.”
This was a rather startling moment of honesty from a person who gets paid to make us think he’s got everything under control.
As McMaken put it, the Fed is actually winging it when it comes to what it will do next. And in fact, the Fed has been winging it all along.
In recent months, the FOMC has eliminated forward guidance as it has been forced to face the reality it was very wrong about ‘transitory’ inflation and the Fed’s ability to stop inflation before it started. The Fed had promised for months that it had a secret plan that would make everything turn out well. But nowadays, the Fed no longer even attempts to keep up the pretense that it has the situation well in hand. Thus, Wednesday’s press conference lacked all the cocksure pronouncements of there being no recession on the horizon, and how the Fed would guide everything to a favorable end. Powell instead was saying things like ‘I don’t know what we’ll do [at the next meeting]’ and ‘I don’t think anyone knows if we’re going to have a recession or not.’ He even said at one point ‘this is the best we can do.'”
If this is the best we can do – well – yikes!