Time to nominate some hawks to the Fed’s Board of Governors.
By Wolf Richter for WOLF STREET.
Amid the biggest and fastest boom in asset prices ever, thanks to the Fed’s radical money-printing and interest-rate repression, Americans’ mood about the economy has soured dramatically as their pocketbooks are getting hit by inflation.
This is now being documented in numerous ways, including by the University of Michigan Consumer Sentiment survey, which dropped to its lowest level in a decade, primarily due to inflation worries.
The surge in inflation is eating up wage gains, and some things have become horrendously more expensive in no time, such as some food items, new and used vehicles, and housing – those prices have risen far faster than the overall inflation indices.
Political polls too have been showing the souring mood and the inflation worries that led to the dissatisfaction with the economy. An ABC poll, released this weekend, was another whack-down for the government and for Democrats – driven by inflation worries.
OK, relying on polls conducted by landlines of 1001 Americans, including 882 registered voters, as this poll was, can lead to iffy predictions. But this has now been consistent in polling all around: People are frustrated with the economy, because they worry about how everything is getting much more expensive, and they’re blaming the government and politicians because that’s what they’re being asked about, and they’re not blaming the Fed, because the polls never ask about the Fed, and because many people don’t even understand what the Fed does and how it does it.
Of the respondents, 62% said that the Democrats were out of touch with the concerns of most Americans – and this is where inflation comes in. But Americans didn’t rate Republicans much better, with 58% considering them out of touch.
The economy was among the key factors – the Fed engineered economy with huge asset-price inflation and now massive consumer price inflation that is driving up costs for regular Americans: 70% said the economy is in bad shape, up from 58% in the spring.
About half blamed Biden directly for inflation. And his approval rating of handling the economy plunged to 39%. And 55% disapproved of how he handled the economy.
Biden doesn’t get to control prices. But he gets to nominate Fed governors. He gets to replace Fed Chair Powell and Fed Vice Chair Clarida early next year. If both step down entirely, he gets to fill four of the seven slots on the Fed’s Board of Governors, and he can install four inflation hawks and make a political deal with them to break the back of this inflation – more on that in a moment.
For people who make a living with their labor, rather than sitting on a pile of inflating assets, well, they now see the purchasing power of their labor get eaten up by soaring rents, soaring home prices, soaring food prices, soaring new and used-vehicle prices, soaring gasoline prices, soaring costs of health care….
The pay increase they got as a promotion for their hard work and productivity just made up for inflation. The 20% pay increase they got when they switched to a better job a few months ago is now getting eaten up by soaring costs.
The broad Consumer Price Index (CPI-U) jumped by 6.2% year-over-year. And the Consumer Price Index for All Urban Wage Earners and Clerical Workers, the CPI-W spiked by 6.9%, the highest since June 1982:
The year 1982 was the Volcker era at the Fed. Nominated by President Carter in July 1979, about 17 months before the end of Carter’s Presidency, Volcker was then used by President Reagan to tame the inflation monster for 40 years.
The Fed started raising its policy rate, the federal funds rate, in 1977 from below 5% to over 10% in mid-1979. When Volcker started running the Fed, he raised rates further, triggering the first recession, which caused him to cut rates again. And that still didn’t vanquish the inflation monster, so he raised rates again to a peak of 20% in June 1981, which triggered the second recession, which did the job of breaking the back of the inflation monster.
Inflation headed down over the decades, triggering the biggest bond market rally and all kinds of other good things, and the Fed earned credibility that it can vanquish inflation, which itself helped keep inflation in check.
Now the Fed has unleashed that monster again. And it has destroyed its credibility that it can vanquish inflation because it doesn’t even want to vanquish inflation.
There is no easy way out; that moment has passed.
The Fed doesn’t need to raise short-term rates to 20%, as in the early 1980s. That would be nonsense. It has a huge balance sheet, as a result of this outrageous money printing, that it can unload instead.
The Fed could raise short-term policy rates to a modest 4% over the next 12 months, which would still be stimulative since that rate is below the rate of inflation, producing still negative “real” short-term rates.
And it could unload the $5 trillion in assets that it bought since September 2019 and bring its assets back down to the still huge level of September 2019 ($3.8 trillion). It could do so over the next 24 months, roughly equal to the average pace of QE since September 2019, only in reverse, thereby unloading about $210 billion every month. This would liberate long-term rates and allow them to float higher.
But instead, the Fed spent months denying the existence of inflation, defying what Americans saw every day in front of them, and then it spent months brushing off the issue by calling it “temporary.” And the government, idiotically, fell in line with that strategy.
The Fed is still repressing short-term interest rates to near-0% and it’s still printing money hand-over-fist to repress long-term interest rates. This week, it will start printing at a slightly slower rate of $105 billion a month instead of printing $120 billion a month, and it said it would stop printing altogether by June next year, I mean, wow.
But it has been an awesome period for the wealthy and the super-wealthy.
The Fed’s policies have created the best boom ever for the biggest asset holders, and thereby have created the biggest wealth disparity ever in the shortest amount of time, between the top 1% of households and the bottom 50% of households on the wealth scale, and even between the 1% and the bottom 99%, according to the Fed’s own data on household wealth, in line with its official dogma of the Wealth Effect.
The bottom 50% (green) hold nearly no assets because they don’t make enough money to put anything aside, and they got nothing from the asset price inflation. But they get to eat the higher housing costs. Even the top 10% to 50% (purple) have little compared to the 1% (red). And the truly rich (the 0.01%) and the billionaire class are totally off the chart:
Biden doesn’t get to set prices. But he gets to nominate Fed governors.
The current Fed is run by Republicans. The sole Democrat on the Fed’s Board of Governors, Lael Brainard, hasn’t been much better; while she frequently voted against loosening up banking regulations (kudos), she never voted against the monetary policy decisions that led to unleashing the biggest wealth disparity ever and the worst inflation in 40 years.
There are seven positions on the Board of Governors. When Trump left office, six were filled and one was vacant. And by early next year, four might be vacant:
- Powell’s term as Fed Chair expires in February. He, the engineer of all this, needs to be replaced, which may cause him to step down entirely, creating the second opening.
- Randal Quarles announced that he would step down, creating the third opening.
- Richard Clarida’s term as Vice Chair expires in January, and he needs to be replaced, which may cause him to step down entirely, creating a fourth opening.
And those four openings on the seven-member Board should be filled by hawks focused on making a political deal with the government to vanquish the inflation monster and to end the use of monetary policy — money printing and interest rate repression — to create ever bigger wealth inequality through asset-price inflation.
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