After a dreadful first term as chairman of the Federal Reserve and a disastrous 40% increase in the money supply in response to COVID, Jerome Powell seems keen to turn things around. At last, he has stood up to tanking markets, committing to beating inflation at the cost of job losses and the risk of recession. And already, the greenback has strengthened in response.
But if Powell really does want to live up to the legacy of his eminent predecessor, Paul Volcker, he can prove it by passing the first 100 basis-point rate hike in more than 30 years.
I had actually assumed that the last time the Fed increased rates by a full percentage point was 41 years ago. That was the last time inflation was this bad, and at that time, interest rates were well into the double digits — not negative as they are today. But in fact, the last 100 basis-point rate hike was in 1989, when inflation was only half as severe as it is in our current crisis.
It’s a telling error on my part and a reminder that our central bank used to take inflation very seriously. Past governors did not wait until price hikes were setting multidecadal records before taking decisive action.
Powell deserves plaudits for what he has done so far — two consecutive 75 bps hikes, in spite of market apoplexy and the growth this adds to the interest on our $31 trillion national debt. However, if Powell really wants to redeem his abysmal first term and prove himself worthy of the Volcker job, he must pass a 100 bps hike now and get interest rates safely within 2 points of core inflation.
According to the Fisher equation, which is taught in high school economics, real interest rates are currently still negative. Even though the Fed has reduced liquidity somewhat by drawing down its balance sheet, core CPI (that is, inflation not counting food and energy) doubled last month, outpacing experts’ expectations and reaching a staggering 6.3%. So the faster interest rates hit 6% and beyond, the better. That starts with Powell’s announcement today, and it will only end once the inflationary crisis ends.
