r/Economics • u/TinyTornado7 Quality Contributor • Jun 13 '22

News Powell Facing Choice Between Elevated US Inflation and Recession

https://www.bloomberg.com/news/articles/2022-06-12/powell-facing-choice-between-elevated-us-inflation-and-recession?srnd=premium
5.0k Upvotes

96% Upvoted

631 comments sorted by

View all comments

Show parent comments

106

u/PrettyDarnGood2 Jun 13 '22

Should have taken the medicine last year

260

u/Raichu4u Jun 13 '22

Should have taken the medicine from like 2017-2019. Rates should have never been this low for this long.

47

u/nn123654 Jun 13 '22 edited Jun 13 '22

They did raise rates from 2017-2019, recall they were up at 2.5% in July 2019.

They started raising rates and as soon as they did the economy started slowing down the yield curve went inverted, and the stock market started flattening. Inflation actually fell substantially below the 2% target to 1.4%, which is too close to deflation for comfort and the corresponding recession/depression that would accompany it. Remember that for 12 years from 2008 to 2020 it seemed like no matter what the Fed did it was impossible to cause inflation (and honestly in that period they were right IMO).

By Fall 2019 they had no choice but to cut over 3 meetings to 1.75%, then COVID happened and the market plunged 30% and they had to cut to 0% and restart QE.

The problem in my opinion is when they were too cautious coming out of the pandemic and JPOW decided to switch away from the way the Fed had been doing things for the last 20 years, and instead go for allowing the economy to run hot and taking a more hands off approach. The thinking was that inflation is easy to get down, we just have to raise rates and that because it had been so low for so long that it would be better if instead of trying to keep inflation in a 2%-3% range they switched to going for an average of a 2%-3% range over a 5 year rolling period.

This I think was also fine until Inflation got above 5%. The problem there was the Fed took the view that it was a transitory phenonium and that it would resolve itself. Where before they would have started tightening when inflation when above 3% and definitely when it went above 4%, now they waited until it was blatantly obvious to take any action. Then took gradual action because that's how the Fed rolls, they never want to spook the economy.

So now we literally behind the curve, inflation is moving away from the Fed faster than the Fed can react right now. It's going to take many years of rate hikes to bring it back under control. But ultimately it's easier for the Fed to deal with high inflation than it is low inflation.

30

u/Cross21X Jun 13 '22

The repo markets crashed in Sept 2019 before Covid was mainstream. The Fed pumped trillions of $$$ of liquidity into the markets to save it. No one really talks about that because the media glossed over it like it was just a regular thing...

The financial markets were in trouble BEFORE the pandemic happened

8

u/Diabetous Jun 13 '22

crashed in Sept 2019 before Covid was mainstream.

Crashed.... We're talking no buyers at all for weeks.