OPINION:
When newly reappointed Federal Reserve Chair Jerome Powell says, “We don’t think it’s a good time to raise interest rates, and that’s because we want to see the labor market heal further,” what is he waiting for? The U.S. has a record number of job openings, and unemployment, while down dramatically from pandemic highs, appears to be stagnating around 4-5%. The labor market has pretty much healed — it’s inflation that needs a trip to the emergency room.
October’s measure of the Consumer Price Index puts the rate of inflation at 6.2%. That’s a 30-year high not seen since the dark ages when none of us owned a cellphone, and nobody tweeted, posted or memed anything. But even this alarmingly high rate is still well below what many economists believe it to actually be. Either the Fed is blissfully ignorant of the shortcomings of using the CPI to measure the real inflation rate, or they’re intentionally turning a blind eye to keep fueling the fires of the “Biden Recovery.”
True, there are a lot of economists, and they rarely agree on anything, but the bar is pretty low to join the econ club. Case in point, I have multiple economics degrees! But regardless of brainpower, most econ nerds agree that the CPI is a flawed measurement. From its use of a four-year lagged market basket of goods to its lethargic inability to recognize the substitution of new goods, it has a well-known bias of underestimating current rates of inflation.
Yet while the Fed continues to model its stewardship of the economy with this archaic index, Mr. Powell tells us not to worry because the inflation we’re seeing is short-term and transitory. In the words of my 90-year-old uncle Don who was smart enough to never study economics: Hogwash! Agreed, short-term supply chain issues create shortages in some markets, but that’s not what’s really driving inflation. It’s not a supply-side problem. It’s all about demand.
Without any increase in GDP during the depths of the COVID-19 economy — actually, a decrease in total output — the Treasury dumped hundreds of billions of dollars in via stimulus payments. At the same time, loan, mortgage and rent payments were put on hold, increasing disposable household incomes even more. True, these were not actions of the Fed, but rather than tempering these massive demand drivers, Mr. Powell kept his foot on the low-interest rate pedal and continues to do so.
This brings us back to questioning whether the Fed really understands basic economics or if there is some other agenda at play. Even though Mr. Powell wears the clothes of a Republican, having bounced around the Bush administration in various treasury posts, he was originally appointed to the Federal Reserve Board in 2011 by former President Barack Obama — the first in over 20 years to be appointed by the opposition party in power. He then obediently served with current Treasury Secretary Janet Yellen as Fed vice-chair and chair for eight years before being appointed by former President Donald Trump as chair himself in 2017.
Notwithstanding the vitriol often exhibited by anyone that didn’t march exactly to Mr. Trump’s cadence, Mr. Powell immediately began raising rates and quantitatively tightening the money supply — without any evidence of inflation on the horizon and with the flawed CPI at historic lows. But now, with inflation at its highest in three decades, he continues throwing coal on the fire by buying bonds and keeping rates well below where the free market would set them based on interest rate futures.
I’ll be the first to admit that the Fed Board is like another couple’s marriage — you never know what’s really going on inside of it, but you usually have a pretty good idea. Mr. Powell’s decisions suggest he is a disciple of the “Yellen Doctrine,” where only unemployment matters, not inflation.
Mr. Powell, like Ms. Yellen, dances to the Keynesian music of the “Money Illusion.” First postulated during the Great Depression by economist Irving Fisher and essentially made a “fact” by Sir Keynes, it observes that people see money in nominal rather than real terms. Folks get a pay raise and think they are richer — spending more while not considering that inflation has eroded their actual purchasing power. Because of this illusion, even with blindingly high inflation, Mr. Powell can sing and dance his way along by lamenting higher than Trump era unemployment numbers and supply chain disruptions.
And let’s not forget that high inflation rates increase the wealth gap. Rather than being abhorred by the left, this plays right into the storyline of justifying wealth taxes, increased corporate regulation and beating up the investment market with punitive transaction fees. Mr. Powell isn’t economically stupid. He, like me, is a card-carrying member of the econ club. It’s just that he currently sits at the cool kids’ table — but lunch may soon be over.
• Kevin Cochrane is an economist who teaches economics and business at Colorado Mesa University. He previously taught at the University of California and was a senior national banking executive.
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