Former Fed Governor Blasts Powell, Says Inflation Is The Fed’s Choice

Authored by Mike Shedlock via MishTalk.com,

“Inflation is a choice for which the Fed is chiefly responsible,” says Kevin Warsh.

The Fed Is the Main Inflation Culprit

In a WSJ Op-Ed, former Fed governor Kevin Warsh says The Fed Is the Main Inflation Culprit, emphasis mine. 

Inflation is a choice. It’s a choice for which the Fed is chiefly responsible. The risk of an inflationary spiral arises when policy makers first dismiss the problem and then cast blame elsewhere. Inflation becomes embedded in the price-formation process when the central bank acts belatedly or with insufficient conviction. To date, the Fed has acted as an enabler.

The sure sign of a problem: when a president gives voice to the scourge of inflation—and takes executive action—well before the central bank acknowledges the severity of the situation.

Chairman Jerome Powell called low inflation—which averaged 1.7% in the prior decade, a mere 0.3 point below the Fed’s target—the pre-eminent economic challenge of our time. So the Fed bet on a new policy regime to get inflation higher. It worked. It’s not the first time a central bank wanted a little more inflation and got a lot more.

Last year, in another break with precedent, the Fed loudly and explicitly endorsed a blowout in federal spending. Congress swiftly agreed. Federal spending increased from an average of about 21% of gross domestic product in the prior decade to more than 30% in fiscal 2020 and 2021. National debt relative to GDP increased from 79% in 2019 to more than 100% today. Most troubling, the Fed bankrolled the fiscal profligacy, purchasing more than half of the new Treasury debt issued this year. Call it monetary dominance.

Achieving a soft economic landing at this late stage is difficult. If the sole task were to drive inflation down, the Fed would immediately taper its asset purchases and start raising rates. But a significant tightening cycle would likely cause market volatility to surge and assets to reprice. The authorities have expressed little concern about financial excesses, bubbles or financial imbalances. Hope they’re right. I expect tension between the Fed’s goals of price stability and financial stability to be in sharper relief in the new year.

Too Late For a Wakeup Call

Achieving a soft economic landing at this late stage is difficult, says Warsh in an obvious understatement.

Unfortunately, it’s far too late for a wakeup call, The bubbles have already been blown. 

This subject came up yesterday on Twitter. 

100% Spot On
The Fed blew another bubble and still doesn’t see it.

Assuming we need a Fed (We Don’t) it should lean against speculation but NEVER does.

How can it when it cannot see the bubbles of its own making? https://t.co/3Y5k8dalu6

— Mike “Mish” Shedlock (@MishGEA) December 14, 2021

More accurately, there should not be a Fed at all.

The market would do a far better job setting rates than these clowns.

— Mike “Mish” Shedlock (@MishGEA) December 14, 2021

Biden Needs to Look In the Mirror

President Biden is whining over inflation. He too is responsible.

On December 13 I wrote Biden’s Union Push is a Push For Still More Inflation

Everything Biden promotes is inflationary.

Biden’s Big Lie

Biden has the gall to say Build Back Better is not inflationary. Fortunately, Joe Manchin isn’t buying the lie. 

Biden’s Build Back Better plan has a provision requiring contractors to pay prevailing wages to qualify for federal tax incentives on green-energy projects.

Prevailing wages are union wages. Costs of all government projects will soar.

Hypocritically, Build Back Better also has a energy tax credits for cars but only if they are union made.

The same applies to solar. Despite climate change being the “existential threat” of our lifetime, only union solutions are allowed.

That raises the price of cars, solar panels, batteries, everything in fact.

Warsh accurately commented “Most troubling, the Fed bankrolled the fiscal profligacy, purchasing more than half of the new Treasury debt issued this year. Call it monetary dominance.”

Hopefully this comes up as a question in the Q&A following Wednesday’s FOMC meeting.

Regardless, the inflation cake is baked, and so is the resultant bubble bursting affair.

Powell bears the most responsibility for this enormous bubble as do Bernanke and Greenspan before him.

For What?!

To achieve a ridiculous 2% inflation target when the measurement excludes housing prices and asset bubbles.

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

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