Federal Reserve Chairman Jerome Powell admitted Tuesday before the Senate Committee on Banking, Housing, and Urban Affairs that inflation is “running very far above our target.”
“This year, in all likelihood, we’ll be normalizing policy,” he continued. “We’re going to end our asset purchases in March, we’ll be raising rates over the course of the year. At some point, perhaps this year, we will start to allow the balance sheet to run off.”
The Fed began purchasing $120 billion in bonds and mortgages per month at the onset of the COVID-19 pandemic, significantly increasing the money supply and contributing to inflation. Currently, the Fed holds $9 trillion in assets on its balance sheet, double the amount held in early 2020.
It has also pumped money into the housing market on a large scale, with one op-ed in The Hill noting, “One reason home prices have been increasing at nearly 20 percent per year is that the Federal Reserve has continued to buy up $15 billion worth of mortgage-backed bonds each month, keeping mortgage rates artificially low. The result has been a booming market, driving home prices, and now rents, higher.”
On Wednesday, the Bureau of Labor Statistics reported that the consumer-price index increased 7 percent over the previous 12 months. This is the highest year-over-year increase since the summer of 1982, which was nearly 40 years ago.
However, the Federal Reserve’s monetary policies are not the only driver of inflation, and some prices are far more elevated than others.
Gas prices, for example, rose 58.1 percent year over year. Similarly, home fuel oil rose by 59.3 percent. These drastic price increases are industry-specific and are sparked by the Biden administration’s energy policies which have intentionally limited the production of natural gas and fossil fuels.
Importantly, Americans are not consuming less energy just because the Biden administration has taken aim at American energy companies. Rather, they are turning to international sources, like OPEC and Russia, for energy.
As Walter Russell Mead said in a recent Wall Street Journal piece, “By artificially depressing fossil-fuel production and investment in the democratic world faster than renewables and other fuels can fill the gap, Biden policy promotes a multiyear, multi trillion-dollar windfall for countries like Russia, Iran and Saudi Arabia.”
OPEC has declined repeated pleas from Biden to lower energy prices, and while Biden terminated the Keystone Pipeline project, killing 11,000 American jobs, he greenlighted the Russian Nord Stream 2 pipeline.
Other price increases were noted in categories such as meat, poultry, and fish (13.1 percent), new cars (10.9 percent), and mens’ apparel (7.6 percent). In other words, everything is more expensive, to varying degrees.
These price increases have completely wiped out any wage gains made by workers. This runs contrary to assurances from both Powell and Treasury Secretary Janet Yellen, both of whom said inflation would be “transitory” through much of 2021.
In response to the current and sustained surge of high inflation, which is high above the Fed’s two percent goal, Federal Reserve officials have begun signaling their intention to constrain monetary policy and reduce stimulus.
According to the Federal Open Market Committee’s December meeting minutes, Fed officials expected to cease purchasing new securities by mid-March, and also determined to reduce the purchases by $30 billion per month. Fed officials also indicated they expect to raise interest rates three times in 2022.
This is consistent with what some regional Fed presidents have told the press in recent weeks. Atlanta Fed President Raphael Bostic recently told Reuters that high inflation and what he describes as a strong recovery will require the Federal Reserve to raise interest rates at least three times in 2022.
“There is a risk inflation is likely to be elevated for an extended period of time and we need to respond directly, clearly, and aggressively,” he said.
Similarly, Patrick Harker, who serves as president of the Philadelphia Federal Reserve, recently told the Financial Times he would be open to more than three interest rate increases this year to combat inflation.
By raising interest rates, the Federal Reserve makes borrowing more expensive and discourages spending in the economy. This reduces demand and hence is intended to relieve inflationary pressures.
Lael Brainard, Biden’s nominee for vice-chair of the Federal Reserve who currently serves on the Federal Reserve Board of Governors, also said inflation is too high and that the Fed must use its monetary tools to combat it. Ironically, Brainard also previously called inflation transitory.
Whatever path the Fed decides to take, its actions will have a major impact on the everyday lives of Americans. With Powell set to secure another term as Fed chair, it will be interesting to see how he balances the political demands of the Left with the Fed’s responsibility to maintain a nonpartisan posture as it focuses on its only two statutory goals as defined by Congress: price stability and maximum employment.
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