There was an interesting op-ed in The Wall Street Journal entitled “The Fed Is the Main Inflation Culprit”.
If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperiled and the social contract is threatened.
During the past several quarters, U.S. inflation has surged—now running about triple the Federal Reserve’s 2% target. The surge in prices is unlikely to reverse on its own. The longer that prices are unstable, the greater the challenge to the conduct of macroeconomic policy. The last thing the country needs is its third major economic upheaval in a decade and a half.
The consequences of inflation—and the attendant risks—have long been understood. In 1898 economist Knut Wicksell explained: “Changes in the general level of prices have always excited great interest. Obscure in origin, they exert a profound and far-reaching influence on the whole economic and social life of a country.”
I agree with the op-ed, but as Paul Harvey liked to say, “And now for the rest of the story.”
The Federal Reserve is only half of The Federal government “Stimulypto.” Starting in late 2008, The Fed crashed their target rate to 25 basis points and began their quantitative easing (QE) program where The Fed purchased Treasuries and Agency Mortgage-backed Securities (MBS) amongst other assets. Notice in the chart below that QE was adjusted, but never went away and The Fed’s target rate only was increased once before Trump’s election as President, then raised eight times then decreased five times. And no rate increases under Biden. So The Fed scorecard is Obama/Biden: 1 rate increase. Trump: 13 rate changes. And The Fed’s balance sheet has gone bananas since the COVID outbreak.
Inflation, as measured by the Consumer Price Index (CPI) didn’t really take-off until March 2021 as a result of STIMULYPTO (excessive monetary stimulus + Federal government spending).
Here is the Federal government spending surge that helped generate the highest inflation in a generation.
So while the op-ed author blames inflation solely on The Federal Reserve, The Fed was unable to achieve its inflation goal for much of the post-financial crisis period. It was the double whammy of Fed monetary stimulus + Federal government stimulus (spending) that pushed inflation to 6.8%.
Following Paul Harvey’s “The Rest of the Story,” I choose baseball player Whammy Douglas to represent the double whammy of Fed + Fed government stimulus to produce inflation. THAT is the rest of the story.
Throw in the Biden Administration’s war on fossil fuels (driving up energy costs by over 50%) and we have a TRIPLE WHAMMY!!
The WSJ op-ed author was focused only blaming The Fed. Sorry, it was a Double Whammy.