On March 7th, Federal (Fed) Reserve Chairman Jerome (Jay) Powell testified before the US Senate Committee on Banking, Housing, and Urban Affairs.
Chairman Powell doubled down on his previously strong stance on inflation, committing the Fed to another rate hike for their March meeting, stating that the ultimate level of interest rates is “likely to be higher than previously anticipated”.
For reference, rate hikes began almost a year ago on March 17th, 2022, with a 25 Basis Point (25 BPS / 0.25%) hike to bring the Federal Funds Rate—the overnight borrowing rate—to a 0.25 – 0.5% range. This was in response to heightened inflation (8.5% CPI March 2022) many associated with supply chain issues and ripple effects from the Russian invasion of Ukraine back in late February.
The truth is, inflation falls on the two parties that have the largest role in managing our economy: Congress and the Fed. Beginning with Congress, it was much like handing a parent’s credit card to a child who is hungry in the middle of a candy store. Of course they’re going to buy absolutely everything they can fit into their arms and then some. In response to COVID, Congress allocated a whopping $5.2 trillion overall, equating to about 82% of the 2022 Congressional budget.
Of that $5.2 trillion, $1tTrillion was allocated to unemployment, which may seem justified considering that 14.7% of the workforce was considered unemployed during the month of April 2020, but about $400 billion of that was allocated after November 2020, when unemployment was a reasonable 6.7% — not far off from the Fed’s target level of around 5.5%.
Additionally, in that same timeline, the government passed almost $800 billion in direct payments to individuals, which is another clear over-allocation considering that unemployment was drastically falling and the stock market had just returned 14.2% in Q4 of 2020.
Stepping away from Congress and focusing on the Fed, whose job it is to manage inflation, we can see that they were far too late to act and were too timid in their initial actions as well. By October 2021, unemployment had fallen to 4.5% below their target level and inflation came in at 6.2%.
The thought at the time as inflation was transitory (temporary), but I believe that the initial wave of inflation was not transitory and should have been acted upon sooner as the cost of borrowing remained at essentially 0 for almost 5 months following November. The Fed could have chosen to act swiftly and root out the non-transitory inflation with a 50-75-75 progression from March to June.
This would have brought the Funds Rate to around 2-2.5% in June as opposed to July. This absolutely would have affected the markets—which hit an initial low-point after the June rate hike—but it would likely have prevented the bottom out that the September rate hike led to and allowed the Fed to accurately assess if the inflation at play was indeed transitory due to supply chain and confounding issues that would eventually self-correct.
Instead, here we are with the potential for the Fed Funds rate to have increased by as much as 5.5% over the course of just one year.
Stay on the lookout for February’s CPI data to release on March 14th. Those wishing to read Chairman Powell’s full testimony may do so here.
