The Fed’s telegraphed decisions were expertly anticipated and analyzed by Dennis and Gerard at 22V. But we’ve not written much about the politics surrounding the Federal Reserve, so this brief note is an infinitely less consequential catchup than the FOMC’s determinations.
Dennis, Gerard, and former NY Fed Bank president and vice chairman of the FOMC Bill Dudley have directly countered the notion that a 75 bps Fed move today implies inflation and other macroeconomic problems can be contained or vanquished in a few quarters. This misses at least two points: 75 bps anytime for any reason is an extreme response, not measured resolve. And it comes as many G7 economies are already reacting to tighter financial conditions.
Dudley is an acknowledged member of the former monetary policy makers club, validated by his membership in the Group of Thirty, a nonpareil set of macroeconomic thinkers, practitioners, and former practitioners. In the minutes after Chairman Jerome Powell’s presser, Dudley pushed back on the notion of a soft landing. Scott Minerd at Guggenheim, noted investor and analyst, said we could be in recession already. The process of slaying inflation could well lead to recession, whether it’s here, coming, or if people merely increasingly feel their household purchasing power has contracted without hope of recovering soon. Americans’ reactions to contraction won’t be driven by official NBER proclamations.
It could prove unhelpful if the signal and then vote to hike hard is being done to address political concerns that the Administration hasn’t sufficiently positioned itself against inflation. NEC Director Brian Deese’s comment that the White House has given the Fed all the space it needs to do its job was a curious way of distancing the White House from Fed policy.
First, few Fed leaders appreciate the White House commenting so much on monetary policy, especially the day before one of the more important FOMC decisions in many years/decades. Second, the 1913 charter gives the Fed all the “space” it needs to conduct monetary policy. The November evening White House meeting after which Powell and Lael Brainard were assured of (re)appointments and announced inflation-fighting as Job One left this Fed already uncomfortably close to a White House out of favor with many poll respondents claiming to be registered voters.
The disinflationary imperative as explained today by Powell will disproportionately hurt working- and middle-class Americans. Inflation this year and rising recession risk next year, if realized, will demoralize some if not much of the Democratic base, fail to lure Independents this November, and embolden Republicans. However, politically this scenario might be considered the best case for Democrats if the damage is limited to the upcoming midterm elections.
