The Fed isn’t the sole cause of today’s inflation
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Jerome Powell (Federal Reserve Board Chair) testifies to’monetary policies and the state economy’ in front of the House Financial Services Committee, March 02, 2022, Washington, DC.
Getty Images| Getty Images
Wall Street analysts, academics, and market strategists seem to flood financial media with an endless stream of statements about inflation.
They argue that during the pandemic global, the Federal Reserve and Federal Government overstimulated economies, leading to inflation at four-decades highs.
According to them, the reason why demand exceeds supply is because too many goods are being bought and not enough money.
Similar arguments have been made by others: the fact that there is a global monetary inflation that does not reflect the disruptions to supply chains that plague the economy over the past two years, but instead it all depends on monetary and fiscal policy.
I understand the premise – but I disagree.
It was a risky period that not many had expected.
Two years ago, people were calling for policymakers to compensate the income lost during a lockdown which lasted much longer than everyone expected. It caused many disruptions in labor supply, goods supply and services sector activity.
While some claim they have the inflation argument right, I can’t remember anyone correctly predicting the appearance of the Covid Delta variant. This would have meant more remote work and sheltering-in place. No one foresaw vaccine refusal and resistance, adding to both the domestic and global death toll. The lack of vaccines in certain countries that produce goods was also not predicted.
Let’s not forget the rise of the micron variant, near-permanent restructuring labor supply, and renewed lockdowns of China and Hong Kong.
Finaly, there were no inflationistas who made clearion calls regarding the imminent war in Ukraine and the subsequent sanctions that have only exacerbated each pandemic or post-pandemic issue we’ve seen in 2022.
I was not prepared for those setbacks in 2022.
We’ve seen that a lot of financial experts blamed the Federal Reserve for the economic woes in recent years. Despite its extraordinary efforts to heal an acute and urgently needed economic wound, it is still being held responsible.
Many now want the Fed to remove the Band-Aid. They claim that decreasing normalized demand is necessary to satisfy constrained global supply.
The Fed must normalize its policy, of course.
However, the Fed should rescind all stimulus. The Fed must do this by adjusting its rates and immediately reducing the Fed’s balance sheet of nearly $9 trillion.
They come as the Biden administration has moved its eyes from the $1.75trillion “” to these callsBuild Back BetterBudget to one that is reportedly focused on deficit reduction Let’s get on the gas.
The causes of inflation
It is possible that the stock market has been experiencing a slight bear market bounce. This is predicated on the notion that an aggressive Fed will win the war on inflation – even though it didn’t start it – and that the economy and corporate profits will grow strongly enough to offset between seven and 11 rate hikes in the next 15 to 18 months.
In 38 years of covering financial markets and studying market history, I’ve never seen it – certainly not under circumstances like these.
A war is currently raging, and it may get worse before it gets better. As Russia’s sanctions become more harsh, this could lead to a conflict that will continue.
Some inflation hawks are housed at Federal Reserve. They may be wrong for many reasons.
It does not make it right.
After the Great Financial Crisis many of them made exactly the same argument. They were right for more than a decade, while others changed their minds with every data point.
Although they may have a valid mechanical view of inflation, given persistent supply disruptions, labor disruptions and global instability it is possible that they could be wrong economics.
For the pyrrhic philosophical triumph that Fed inflation caused, Americans could be very costly.
This is more likely to be due to the pandemic or Russian President Vladimir Putin.
— Ron Insana is a CNBC contributor and a senior advisor at Schroders.
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