Federal Reserve Chairman Jerome Powell testified in Congress. He said that the inflation we are experiencing today is not transitory. Rather, he said that the high inflation will last well into next year and perhaps longer. Shockingly, he said he is only “considering” acting more quickly to reduce inflation.
Recently Secretary of the Treasury Janet Yellen agreed. The inflation we are experiencing today is not transitory.
As noted in this space in early March and then in late March, early April, late April, early May, later May, early June, mid June, mid July, late July, August, September, early October, mid October, early November, and mid November— the inflation problem is not transitory but, rather, long-lasting unless government fiscal and monetary policies change quickly and dramatically.
Finally, Powell and Yellen seem to agree with my prognostications, but Powell is not ready to act. The Fed should act immediately. The longer the Fed waits, the worse the inflation problem will be.
Blame It on the Supply Chain
Frankly, Powell and Treasury Secretary Janet Yellen simply don’t get it. They continue to believe that the inflation is caused by disruptions in the supply chain. Much of the supply chain issues are caused by labor shortages.
“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” Powell told Congress today.
The fear of the virus may be causing some of the labor shortage issues, but the real reason that more than 3 million mostly lower-paid workers have dropped out of the labor force is simply because they can.
In the last two years, the federal government has given thousands of dollars of free money to all households. Most of this money has been saved. Add that to the extra unemployment benefits those workers received, and their ability to live in their apartment while not paying rent for almost two years, we can see why those workers are not returning to the labor force.
Even when workers return to their employment and the supply chain issues are resolved, the inflation problem will persist That’s because most of the inflation is caused by excess demand rather than supply shortages.
Monetary Supply Up 20%
The excess demand comes completely from government monetary and fiscal policies. The Fed continues to rapidly increase the money supply, which has grown by more than 20% in the last year. Virtually every unbiased economist will say that this is purely inflationary, especially considering that the economy is now operating at a higher level than before the pandemic.
The Fed increases the money supply by purchasing $120 billion of government securities each month. To pay for that, the Fed simply electronically prints more money.
In addition, the Fed has kept interest rates near zero, even as growth has accelerated and as enough jobs have been created to lead to a full employment economy. The low interest rates have increased the demand for interest rate-sensitive products like cars and houses, which is why those prices are rising much faster than the inflation rate.
Put the Brakes on Gvt. Spending
On fiscal policy, the government should immediately take action to reduce government spending. In Fiscal 2020 and 2021, the federal government spent nearly $6 trillion more than it received in revenue. On a $22 trillion economy, the excess demand created by the over-spending is a big factor contributing to inflation.
The spending has also added to the public debt, which is approaching $30 trillion. The debt ceiling has been reached so now Congress must raise it. One way to control government spending is to only increase the debt ceiling by a small amount.
Treasury Secretary Janet Yellen appears not to be interested in trying to control government spending. Rather she wants Congress to raise the debt ceiling enough to cover all of the spending the Biden administration and Congress want.
If one finds oneself stuck in a deep deficit hole, the first thing one must do is to stop digging.
Listen Up, Jay
It is encouraging to see that the Fed is finally admitting that the inflation problem is not transitory. Although the Fed has just started to gradually reduce the bond-buying program, they should immediately raise interest rates. Since there are 10 million job openings and 7 million unemployed workers, it is obvious that no more expansionary monetary policy is needed.
Listen up Chairman “Jay” Powell, the time to act is now. Waiting any longer will lead to higher inflation and possibly worse.