Up until now, I've been cheering the Fed on, grateful that Jerome Powell took his lumps for the way too easy money policies in late 2021, and cranked hard on interest rates to beat inflation. I think in 2022, this Federal Reserve acted more responsibly in the long-term interests of our country than any other central bank in the world, and made the hard, right choices, to preserve the dollar's status as the world's reserve currency for perhaps a few more decades at least. They certainly proved that they are, if not the best, then perhaps the "least bad" central bank in the world in 2022, in my mind. (And yes, I know that "best" and "least bad" is the same thing...)
But, I don't understand why they proceeded with the hike yesterday, or at least didn't slow down.
Prices increased by 0.1% from October to November. If we carry that forward linearly over the next 12 months, that will lead to a ~1.2% increase in prices. This is less inflation than the Fed's 2% target.
Now, inflation compared to last year is still up 7.1%. But, that's not because prices are currently going up too fast. That's because prices already did go up and we are now at a higher baseline. High inflation in late 2021 and early 2022 made prices 6,7,8,9% higher. We can't compare prices to a year ago when determining monetary policy. We have to examine where we are and where we will be. That prices are 7.1% higher than they were a year ago is sunk cost. It's over. Done. The Fed's job going forward needs to be to ensure that inflation over the next 12 months remains at ~2%.
And right now, we are trending below that inflation target.
Inflation, unless the Fed is seeing something I'm not, is essentially over. It appears to me that all we have to do is sit and wait 12 months, watching things, and we are likely to see prices right at the 2% level that we target, maybe below.
Why then, are we still raising rates? Raising rates increases the likelihood of deflation (if you thought inflation was bad, wait until we see deflation!) if the CPI data is to be believed. There are a whole bunch of reasons to believe that we are heading for a worsening recession (or the start of a recession - usage of the word "recession" to describe the current climate depends on your political affiliation here in 2022 - I welcome all viewpoints on this!) in 2023, with layoffs, a new higher baseline of rates, etc. On top of that, we have seen energy prices come way back down to earth, we are seeing housing prices falling, and a large percentage of inflation WAS tied up in supply chain issues, which are continuing to resolve.
I think the risk now is not inflation continuing to loom, but rather a severe overcorrection and needless worsening of the economy and growth. Up until now, I thought I understood the Fed's motivations, but it appears I miscalculated. Rather than trying to beat inflation and guide us towards a 2% inflation rate artfully, they appear ready to bulldoze their way to... deflation?
Anything I'm missing here or do other folks feel the same way?
