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 pointed to inflation, but it is not moving fast enough.

Earlier this month, the Fed raised the federal funds rate by half a point, and further half a point and a quarter increases are almost certain for the rest of the year.

In June, it will begin lowering the nearly $ 5 trillion in Treasury securities, mortgages and other securities it bought by printing money to fund the pandemic relief.

Now read this: Even a recession would not cure inflation, says former Obama adviser Jason Furman

Powell for a while

Fed Chairman Jerome Powell suffered as labor markets overheated and told us that all the money he printed mattered. Now, he believes he can reduce inflation without causing too much unemployment.

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

Too Much Money Pursues Too Little Property: Households and nonprofits have about $ 3 trillion more in their current accounts than before the pandemic. Eliminating this and other excess liquidity in business and other balance sheets would take perhaps four years at the rate the Fed expects to sell the Treasury and mortgage-backed securities.

We face the danger that Powell will succumb to pressure from the White House to help re-elect President Joe Biden, as President Arthur Burns did with President Richard Nixon, and ultimately trigger double-digit inflation.

Structural problems

Leaving aside recent missteps, structural problems will make the next decade much harder in both the United States and Europe than the historical period of slight inflationary pressures in the pre-pandemic years.

The broader US-NATO strategy of trying not to antagonize President Vladimir Putin in a nuclear or chemical escalation of the war in Ukraine, including not providing fighter jets in Kyiv to provide air cover and weapons to attack targets military and infrastructure in Russia, probably means a stalemate.

Russian and Ukrainian exports of agricultural commodities W00,
-2.21%,
fertilizer, oil CL00,
+ 1.48%
and gas NG00,
-0.07%
and the metals will deteriorate significantly over the years. Other sources of supply may be developed, but these will take several years and will be more expensive.

Farmers face higher diesel and fertilizer costs, food inflation will persist, and shortages of other critical materials, such as nickel to aid in the transition to green energy, will be exacerbated.

Deficiencies and delays

Accelerating the shift to green energy and electric vehicles is creating a shortage of lithium and other metals needed to build batteries, motors and transmission lines.

It can take up to 10 years to allow and build new mines. Getting the approval of high voltage lines to carry electricity from where the sun shines or hydropower is plentiful to where people need electricity is equally difficult.

Even before Russia invaded Ukraine, this year global supply chains were not expected to heal. Thanks to just-in-time manufacturing and international wage arbitration, complex manufacturing systems that are spreading to China and other parts of Asia are proving to be inflexible and prone to scarcity.

According to Kastle, office occupancy rates remain at about half of pre-pandemic levels. Adjustments in the use of commercial buildings, for example, reduce the area of ​​offices and turn them into alternative uses, and the continued construction of domestic workspaces will be costly.

Even with declining sales, home prices are up 20% a year, because harsh zoning and building codes make new buildings too expensive at reasonable distances from city centers. Mortgage rates exceeded 5% in anticipation of the Fed tightening, but at the current rate of inflation, mortgage rates will need to approach 10% to reasonably align demand with supply.

Oil war

China’s zero COVID policy was delayed, but it did not prevent slower growth and factory closures. While during our pandemic it was difficult to bring products made in China to America, now with COVID-19 affecting Shanghai, Chinese plants do not always make the products.

Biden continues its war on oil and gas by cutting federal land eligible for rent by 80%, charging royalties 50% and imposing tougher environmental regulations on drills.

Even falcons among Fed officials place the neutral rate of federal funds that will not overheat or slow the economy to around 2.5%. This is too low and only about half of what needs to be done.

To bring inflation to 2%, the Fed would have to raise the federal funds rate at each meeting, approximately every six weeks, by one full percentage point. By selling Treasury securities and mortgages, it should similarly increase the 10-year Treasury rate TMUBMUSD10Y,
2,752%.

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

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

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