Does it make sense to plow a ship at full speed through iceberg-laden waters until you see an iceberg dead ahead? The Titanic answered the question.
The Fed now sees the inflation iceberg but continues full speed ahead with monetary policy. William McChesney Martin, chair of the Fed from 1951 to 1970, knew the folly of such a monetary policy when he noted that the job of the Fed was to take away the punch bowl just as the party gets going.
The party has been going full blast for quite some time now and the iceberg has been seen but the Fed continues to fiddle. The president of the New York Fed said on Jan. 14 that the Fed may raise interest rates “as early as March.” It, unfortunately, decided to continue full speed ahead at its January meeting. After the meeting, the Bureau of Labor Statistics announced the inflation rate for the previous 12 months was 7.5 percent, the highest in some 40 years.
The Fed’s delay in addressing inflationary pressures puts it on course to establish a new standard for incompetence in the management of U.S. monetary policy.
The Fed has a legislatively determined dual mandate to promote price stability and maximum employment. In favoring maximum employment over price stability, it is likely to wind up with neither. It appears that at its March meeting the Fed will turn its attention to curbing a politically and economically costly inflation. If history provides any guidance, this will not be easy. Unemployment will rise and the equity and real estate bubbles will pop. The Fed’s delay in addressing the inflation problem has made it miss an opportunity for a soft landing.
The problem with a dual mandate is as old as the Bible. “No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other.” The Fed has focused on serving its employment master while disregarding the price-stability master. Now, as inflation rages the price-stability master will be given preference. The Fed’s erratic policies can be likened to that of a drunk driver who oversteers the vehicle then oversteers in attempting to correct the error. I wish the Fed would sober up.
Making matters worse, progressives are pressuring Congress to give the Fed two more masters — green energy and equity. The Fed can’t handle two goals effectively. How can it possibly deal successfully with four? And apologizing for my analogies, the Fed may soon have its rudder disabled.
Green energy and equity issues rightfully belong to fiscal policy, where Congress and the president debate the desirability of taxes and subsidies in a manner that is transparent and politically accountable.
Pundits are betting that the Fed will raise its targeted federal funds rate as much as seven times in 2022. If so, the rate would approach two percent. The inflation-adjusted real rate would likely remain in negative territory. This is hardly a scenario for fighting inflation. Since the Fed has never delineated the factors that cause persistent inflation, can we expect it to have an effective anti-inflationary game plan?
The decade is shaping up as a return to the 1970s when prices doubled. G. William Miller was at the helm of the Fed at the end of the 1970s when inflation hit new highs. Oddly enough, Miller and Jerome Powell, the current head of the Fed, both had formal training in the law. Neither were professional economists. They both tried to serve two masters and both produced record inflations. A new-day Paul Volcker is needed to bring some focus back to monetary policy.
Burton A. Abrams is professor emeritus of economics, The University of Delaware and author of “The Terrible 10: A Century of Economic Folly.”