The Federal Reserve destroyed its reputation in a single year, says a growing number of market strategists. From missing the mark on price inflation to adding trillions to the balance sheet, the U.S. central bank has failed to get just about anything right this year. Consider Fed Chair Jerome Powell’s multiple pivots in 2021. Like every overweight individual or indebted consumer, the Eccles Building will have a few New Year’s Resolutions in 2022, mainly trying to juggle inflation and economic growth. But, similar to the millions who abandon their goals by spring, will the institution soon chuck its plans in the trash receptacle?
A Powell Putsch or Pivot?
Jerome Powell (Photo by Alex Wong/Getty Images)
In November, the U.S. central bank started trimming its $120-billion-a-month pandemic-era quantitative easing program. At the December Federal Open Market Committee (FOMC) policy meeting, officials agreed to accelerate the tapering, with an objective to close the book on these asset purchases by March. The dot-plot – a series of interest rate projections from FOMC members – projected three hikes to the fed funds rate over the next 12 months to help curb a 39-year-high consumer price index (CPI) and personal consumption expenditures (PCE) price index.
Still, even with these monetary tools, economists and consumers anticipate sky-high inflation throughout the year. Indeed, Wall Street and the broader economy have become addicted to the trillions of dollars worth of liquidity injected in the country. From a rising gross domestic product (GDP) to the leading benchmark indexes on the New York Stock Exchange hitting record highs, the newfound prosperity was achieved through irrational exuberance and euphoria manufactured by the Fed.
With everyone panicking in the streets over the Omicron variant and special interest groups clutching their pearls over President Joe Biden’s Build Back Better agenda coming under threat by a maverick Democratic senator, could the U.S. economy hit an iceberg in the sea? This is what Powell is trying to avoid as he navigates the ship through a post-crisis storm, mixed with rampant inflation, lackluster economic data, a global supply chain mess, and a labor crisis.
Will these plans even be followed through in 2022? Powell conceded that the FOMC rate projections might not be the official plan during a post-meeting press conference. And there is some disagreement within the world’s most powerful monetary policy body. Fed Atlanta Bank President Raphael Bostic wanted to put the kibosh on transitory a few months ago, while San Francisco Federal Reserve Bank President Mary Daly finally admitted that inflation is real, telling The New York Times:
“My community members are telling me they’re worried about inflation. What influenced me quite a lot was recognizing that the very communities we’re trying to serve when we talk about people sidelined from the labor market are the very communities that are paying the largest toll of rising food prices, transportation prices and housing prices.”
Whether these folks will possess the temerity to halt the printing presses or not remains to be seen. Whatever the case, other central banks might steer their vessels in the same direction as the Fed.
Around the World in 365 Days
The European Central Bank (ECB) chose to suspend any rate hikes, although it announced plans to shut the door on pandemic emergency purchase programme (PEPP) in March. At its last policy meeting, the Bank of England (BoE) pulled the trigger on a minuscule rate increase. The Bank of Canada (BoC) could be raising interest rates as early as April after becoming the first major central bank to diminish its QE efforts. The Bank of Japan (BoJ) and the People’s Bank of China (PBoC) are poised to fire off some bazookas again as their respective economies endure anemic growth. Overall, the consensus is tapering, tapering, and tapering. But many of these policymakers are frightened to make a move without repeating the strategies from the Fed playbook, which was clear on the hilarious notion that inflation was transitory. As the famous line from The Mikado goes: “Your notions, though many, are not worth a penny.” Or, in today’s case, a devalued Federal Reserve banknote.
Fed Up
One chief development in 2021 was certain: The Federal Reserve was behind the curve on inflation. Powell and his colleagues insisted that inflation would not occur from the fiscal and monetary stimulus campaigns. They pivoted and attempted to calm things down by claiming inflation would be brief but not hot. The institution conceded that red-hot inflation had arrived by the time summer came, but it would be temporary. As prices soared to their highest levels in nearly four decades, Powell and Treasury Secretary Janet Yellen conceded that they were wrong, abandoned transitory, and forecast that climbing inflation would be prevalent for much of 2022. Should inflation fail to subside by the time next Christmas arrives, perhaps the calls from Ron Paul’s 2008 campaign should be renewed: End the Fed.
~ Read more from Andrew Moran.
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