By Peter Morici
The Fed has taken aim at inflation, but it isn’t moving fast enough.
Earlier this month the Fed boosted the federal funds rate by half a point, and more half and quarter point increases are almost certain over the remainder of the year.
In June, it will start running down the nearly $5 trillion in Treasury, mortgage-backed and other securities that it purchased by printing money to finance pandemic relief.
Fed Chairman Jerome Powell dallied as labor markets overheated and told us all the money he was printing didn’t matter . Now, he believes he can bring down inflation without inflicting too much unemployment .
Too much money is chasing too few goods—households and nonprofits have about $3 trillion more in their checking accounts than before the pandemic. To mop up that and other excess liquidity on business and other balance sheets would take perhaps four years at the pace the Fed expects to sell Treasury and mortgage-backed securities.
We face the danger that Powell will bend to White House pressure to help re-elect President Joe Biden, as Chairman Arthur Burns did for President Richard Nixon and ultimately unleashed double-digit inflation.
Recent policy missteps aside, structural problems will make the coming decade much tougher in both the United States and Europe than the historic period of mild inflationary pressures of the prepandemic years.
The U.S. and broader NATO strategy of trying to not antagonize President Vladimir Putin into a nuclear or chemical escalation of the war in Ukraine—including not providing Kyiv with jet fighters to provide air cover and weapons to strike military and infrastructure targets in Russia— likely means a stalemate .
Russian and Ukrainian exports of agricultural commodities /zigman2/quotes/210389638/delayed W00 +2.27% , fertilizer, oil /zigman2/quotes/209723049/delayed CL00 +2.07% and gas /zigman2/quotes/210189548/delayed NG00 -1.54% and metals will be significantly impaired for years. Other sources of supply can be developed but those will take several years and be more costly.
Farmers face higher diesel and fertilizer costs, food inflation will persist and shortages of other critical materials—for example, nickel to help in the transition to green energy—will be exacerbated.
Shortages and delays
Accelerating the shift to green power and electric vehicles is creating shortages of lithium and other metals necessary to build batteries, motors and transmission lines.
It can take up to 10 years to permit and build new mines . Getting high-tension lines approved to bring electricity from where the sun shines or hydropower is abundant to where folks need electricity is similarly difficult.