The Federal Reserve is in a fix — inflation is hardly temporary, transitory or going away anytime soon. Even if pandemic and supply chain disruptions were to magically disappear tomorrow, President Joe Biden’s swelling budget deficits are making the monetary policy tradeoff between stable prices and healthy employment growth unworkable for the long term.
Consumer prices are rising at the fastest pace in three decades.
It’s not just pandemic-related shortages of rental cars and Chinese imports. Rather, rising energy prices — manufactured by Mr. Biden’s ill-conceived efforts to curtail fossil fuels — and labor shortages that will persist have spread havoc throughout the economy.
Workers are demanding and getting higher wages, and consumers and businesses expect inflation to continue. Employees are quitting jobs when they don’t get the raises they expect and finding new positions so quickly that new unemployment claims have hit historic lows.
Either Chairman Jerome Powell’s economists have been consistently wrong about inflation, or Mr. Powell and Sec. Janet Yellen have consistently made bad calls on their own for nearly eight years. More importantly, together, they have enabled Mr. Biden’s irresponsible stimulus spending by printing money to monetarize federal debt instead of forcing the government to borrow all the money it needs from private investors.
Resulting rock bottom mortgage rates are hurling home prices to Mars and beyond the reach of young families — even if they could hitch a free ride on Elon Musk’s spaceship.
Runaway inflation especially victimizes low-income Americans and the elderly reliant on fixed pensions and interest from CDs and bonds. Whereas when the middle class and wealthy can frequent restaurants less, inflation compels the working poor and grandparents to simply eat less.
Rising prices have outpaced wages, so where’s the extra money going? Into oil exporters’ pockets. That empowers Saudi Arabia to cozy up to China and President Putin to intimidate Ukraine and threaten to withhold natural gas from the E.U.
Many businesses have been raising prices more rapidly than their labor and material cost warrant to fatten profit margins. That will boost stock prices next year and generally make the top 1% even richer.
Now for the bad news — supply-chain disruptions may get a bit better in 2022 within the United States but not globally. The coronavirus is gripping Europe anew, China’s “zero COVID” policy keeps its ports in a tangle with knock-on effects around the globe, and the omicron variant creates new uncertainties.
We can expect shortages to persist. With $3 trillion or more in Powell-Biden stimulus cash sitting in household and business checking accounts, the bidding war at Walmart and Chevy dealers will continue.
To curb all that inflation, the Fed should not only phase out bond purchases more quickly but also start selling bonds off its balance sheet to quickly vacuum liquidity out of the system. With Mr. Biden’s Build Back Better likely to create much bigger federal deficits, that would boost interest rates to levels that threaten a Volcker-style recession and put President Trump back in the White House.
Consequently, Mr. Powell will do too little too late — the same for central banks in the U.K., E.U. and China.
The most important things to remember about climate change are that if China and India don’t do their share, the U.S. will bear trillions in costs to cut carbon dioxide. Additionally, the U.S. will end up sending more jobs to China and elsewhere in Asia and stifle growth at home.
It makes no sense to curtail oil and gas production now if the EVs and batteries to power those and backup solar and wind power are not yet ready — and they are not. Instead, anti-fossil policies drive up inflation.
Thanks to pressure from Washington, European capitals, woke financiers and environmental activists, western oil companies are cutting back on developing new wells. That gives the market to Russia, Saudi Arabia and the rest of OPEC and skyrockets gasoline and home heating costs into the stratosphere.
The required rate of return on a new fossil fuel project is now about 20%, but on green energy projects only 5%, and pressures are building on the Fed to slant things further through bank regulation.
Next on Mr. Biden’s appointments agenda is a Fed vice chair for financial regulation. Rest assured, it will be someone sympathetic to turning the screws on big oil and wildcatters. And though they will report to Mr. Powell, the chairman has foolishly stated he will leave bank regulation to whomever the President names.
Of all of Mr. Biden’s dumb appointments — FTC Chairperson Lina Khan, USTR Amb. Katherine Tai, Sec. Lloyd Austin and Saule Omarova for comptroller of the currency — Mr. Powell takes the prize.
• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.