For an economist as I’m, Federal Reserve Chair Jerome Powell’s press conferences have turn into ever extra painful to observe.
It’s not due to Powell’s polished solutions to the journalists’ queries.
Fairly, it’s that the journalists don’t ask Powell the powerful and apparent questions which may point out how misguided is the Fed’s data-dependent and overly hawkish monetary-policy stance.
Milton Friedman taught us inflation is “all the time and in all places a financial phenomenon.”
Why then does Powell not a lot as point out the huge swings within the broad cash provide (M2) beneath his watch when discussing the financial outlook?
In spite of everything, we’ve gone from a scenario through which the broad cash provide elevated by a staggering 40% from the beginning of 2020 to the tip of 2021 to a scenario the place it’s now truly contracting for the primary time for the reason that Fed started compiling these numbers in 1959.
Journalists fail to ask the essential query these swings immediate: In the identical method because the ballooning cash provide in 2020 and 2021 led with a lag to a surge in inflation to a multi-decade excessive of greater than 9% by June 2022, won’t the unprecedented money-supply contraction we’re now seeing lead with a lag to a recession and a renewed bout of deflation subsequent yr?
And may the Fed’s continued interest-rate hikes and aggressive quantitative tightening not result in an additional contraction that might put extreme downward strain on the economic system?
A current Federal Reserve examine prompt that as many as 37% of US firms have distressed debt conditions.
That may be a disturbingly excessive quantity for this stage of the credit score cycle.
We all know, in the meantime, that commercial-property house owners are scuffling with low occupancy charges as post-COVID extra employees select to work at home.
And we all know that over the following two years, these firms have $500 billion a yr to roll over at very a lot larger rates of interest than they’re now paying.
But the journalists don’t ask Powell whether or not the unusually speedy tempo at which the Fed has raised rates of interest by 525 foundation factors over the previous yr at a time many firms have distressed debt conditions won’t result in an actual credit score crunch in 2024 after we will see a wave of company debt defaults.
One thing that’s allowed the US economic system to resist the Fed’s aggressive monetary-policy tightening thus far has been the surplus financial savings that have been constructed up on the again of the massive COVID-related authorities checks despatched out to households and firms.
However one other current Federal Reserve examine means that by now these extra financial savings have all too doubtless been depleted.
But the journalists don’t ask how a lot sense it makes for the Fed to maintain elevating rates of interest when an necessary plank supporting the economic system has been or is about to be eliminated.
The journalists additionally seldom ask Powell how financial developments overseas may have an effect on our economic system.
That is all of the extra shocking when China, the world’s second-largest economic system, is scuffling with the bursting of its outsized property and credit score market bubble.
May not a slowing Chinese language economic system put additional downward strain on worldwide commodity costs and have a meaningfully dampening impact on the US and world economies?
By not asking Powell the fitting questions, the journalists do us a disservice.
They permit the Fed chief to stick with an excessively restrictive coverage that pays too little heed to altering financial, monetary and exterior financial developments and largely ignores the lengthy and variable lags with which financial coverage operates.
American Enterprise Institute senior fellow Desmond Lachman was a deputy director within the Worldwide Financial Fund’s Coverage Improvement and Overview Division and the chief emerging-market financial strategist at Salomon Smith Barney.
