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Inflation Is Too High And The Fed Is Determined To Bring It Down

John Galt

Updated: May 10, 2022

inflation is too high
Editor’s Note:

EDITOR'S NOTE: At a news conference last week, Fed Chief Jerome Powell made a statement aimed directly at the American people. He said that yes, inflation is way too high and that the problem of solving it lies solely on the shoulders of the Federal Reserve; that the Fed has the tools necessary to bring stability to prices. When asked about other branches of government and their role in containing inflation, he redirected the focus back to the Fed. Powell’s statement tells us a lot, for what appears like a bold admission is, in essence, a screen of concealed omissions. Doesn’t fiscal policy play a significant role in driving inflation? How might the Fed's squeezing of the money supply ease inflationary pressures stemming from external drivers such as global supply chains and the effect of the Russia-Ukraine war on commodities, food, and energy prices? And does the Fed sincerely believe it can carry out a soft landing, similar to how it once thought it can raise inflation to levels not exceeding 3% to 5% inflation year over year? So, the Fed says it’s “owning it,” so to speak. But what does it own besides a rhetorical gesture, for there is virtually nothing of substance in Powell’s speech.

The two most striking moments of Federal Reserve chair Jerome Powell's news conference yesterday came at the very beginning and near the end, Axios' Neil Irwin writes.

  • He started the session by staring into the camera and telling the American people that inflation is too high and the Fed is determined to bring it down.
  • Later, when asked a question about what other branches of government could do to fight inflation, he demurred, essentially saying inflation is the Fed's problem to solve.

Why it matters: The Fed may be late in attempting to bring down inflation, but Powell is putting the problem squarely on his own shoulders, leaving no doubt that, for better and worse, the central bank will squeeze the money supply until prices stop rising so fast.

  • In the news conference, Powell all but pre-announced that this week's half-percentage point rate hike — the first in two decades — will be followed by at least two more.

Between the lines: Powell's initial comments were aimed at ordinary Americans, not the economics reporters and bond traders who habitually hang on his every word. "Before I go into the details of today’s meeting, I’d like to take this opportunity to speak directly to the American people," he said.

  • "Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down," Powell continued. "We have both the tools we need and the resolve it will take to restore price stability."

In response to a question about what the Biden administration or Congress might do to contain inflation, Powell didn't take the bait, such as by pointing out that steel tariffs aren't helping supply constraints. "It's really the Fed that has responsibility for price stability," he said. "We need to stay in our lane and do our jobs."

  • "When we get inflation back under control, then maybe I can give other people advice," he quipped.

Flashback: You can contrast that tone with that of Arthur Burns, the Fed chair during the 1970s who presided over a time of rapidly rising inflation. He tended to have a laundry list of reasons high inflation wasn't the Fed's fault.

  • In a self-pitying speech in 1979 titled "The Anguish of Central Banking," he blamed "the persistent inflationary bias that has emerged from the philosophic and political currents that have been transforming economic life" since the 1930s.

The bottom line: The Powell Fed isn't going to emphasize Burns-like excuses if inflation remains high — which means that the tightening will continue until prices relent, even if that turns out to mean economic pain ahead.

Originally published by Axios.

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