They must immediately and gradually reduce the $120 billion per month bond-buying program. They also must immediately and gradually raise interest rates.
This week, the Federal Reserve (Fed) will meet for its annual symposium at Jackson Hole, Wyoming. This symposium is sponsored by the Federal Reserve Bank of Kansas City, which has held this event since 1978. The Fed usually doesn’t set or change any policy during this time, but rather it focuses on general economic issues facing the U.S. and world economies.
This year it should move to set or change current policy. The Fed’s Open Market Committee will meet again for its regularly scheduled meeting next month, but each month that action is delayed means that the action must be stronger when finally taken. Frankly, Fed action was due much earlier this year.
What action should the Fed take?
Inflation since January has been a problem for the U.S. economy. Since January, consumer prices, as measured by the Consumer Price Index (CPI), have increased by more than 4%. If this rate continues, inflation for all of 2021 will be more than 7%. This greatly exceeds the Fed’s target, which is usually between 2% and 3%.
While the Fed, as well as the Biden administration, continues to say that the inflation problem is transitory (temporary), an objective view of the data leads to a much different conclusion. The Fed says it is supply chain disruptions caused by COVID-19-related shutdowns and severe winter weather that has caused the inflation. It claims that inflation will disappear once those disruptions are corrected.
The problem with that explanation is that almost all of the supply chain disruptions have been resolved, yet prices continue to rise. In July, the GDP level was about where it was prior to the shutdowns in March of 2020. Yet prices continue to rise. In fact, prices at the producer level rose 1% in the month of July. That’s more than a 12% annual inflation rate.
If producer prices rise, a month or two later consumer prices will have to rise so that business can maintain profit margins. That means the inflation problem is likely to get worse in the near future, not better.