When the chair of the US Federal Reserve appeals to “faith” in trying to contain inflation expectations then it is time for serious worry (“Jay Powell dismisses claims of Fed complacency on inflation”, Report, FT.com, July 14).
There is little basis for the chair’s call for faith. The Fed did not forecast the current price surge. It previously failed for an age to raise inflation to 2 per cent. Acting to lower inflation would contradict its target of hitting “maximum” employment. The evidence of excess liquidity is everywhere, from money markets to stocks and housing, and to cryptocurrencies. The Fed is busy financing fiscal excess when the economy has suffered an adverse supply shock.
The Fed knows that some one-off price hikes, such as cars, will unwind and pins its hopes on that. However, inventories are at record lows when demand is surging and shelter costs have begun accelerating. Core inflation will rise further. The need to phase out quantitative easing before hiking rates means hikes probably cannot start until the second half of 2022, which looks unlikely since that would be just before the politically crucial midterm elections.
The Fed is therefore a bystander. The reason Jay Powell calls for others to have faith is because that and hope is all he himself has. Let us pray.
Purchase, NY, US