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> Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably. Fed causes massive problem, and

> Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably. Fed causes massive problem, and then eventually stops it from getting worse... Hooray? Inflation is still twice the target rate at 4%. Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.

drexlspivey 3y ago
More like the federal government causes massive problem and Fed comes to the rescue
- nostromo 3y ago
  Both were the problem. The Federal Reserve buying up 1.5 trillion dollars of mortgages around 2020, for example, surely contribute to housing cost inflation. https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
  - jjoonathan 3y ago
    It was eye-opening to watch how the news reported the two prongs of stimulus. Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing. Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.
    - drexlspivey 3y ago
      That's because "Fire-hose of money aimed at rich people?" (I assume you mean QE with that) does not cause CPI inflation which is the main problem.
HPsquared 3y ago
Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.
mediaman 3y ago
I think it's unfair to pin this on the Fed. Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity. Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing. As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.
- adam_arthur 3y ago
  While I agree that fiscal stimulus, which drove excess demand and thus shortages was the primary culprit in inflation, the Fed deserves more blame due to having the ability to unilaterally make the decision to intervene, yet choosing not to. The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation. https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-makes-the-case-for-stimulus/ https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...
- smileysteve 3y ago
  Some of the volatility can be blamed on the Fed; It's a major component of the money supply that is less bureaucratic than congress. So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake. Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).
tekla 3y ago
"Firefighters cause massive water damage when fighting massive fire, news at 11"
- nostromo 3y ago
  Jerome Powell himself admitted they overdid stimulus, massively contributing to inflation.
  - afterburner 3y ago
    Much better to overdo stimulus in a crisis and prevent a cratering economy (and human suffering) than the opposite. Stimulus is hard, politically, basically only possible at the peak of the crisis. Raising rates to undo it after you know the stimulus did its job is easy. Under-stimulating is what happened in 2008+ thanks to Republican obstruction and fear of electoral "anger", and we got years of extra suffering as a result.
  - Analemma_ 3y ago
    But you also have to consider the counterfactual: we did way too little stimulus after the GFC in 2008, leading to the economy being depressed much longer than it needed to be. Obviously it would've been nice if we had done exactly the right amount of stimulus, and easy to armchair-quarterback in retrospect and say the "right amount" was obvious, but at the time it was not.
MuffinFlavored 3y ago
> Fed causes massive problem, and then eventually stops it from getting worse... Hooray? Was it the Fed or was it Congress through policy? Congress needed to do something in the response to the pandemic for the people, right? Therefore, why does Congress deserve blame? They helped people out, didn't they?
afterburner 3y ago
> Inflation is still twice the target rate at 4% First of all, the article says inflation is at 3%. Sounds like you're over-reacting here. 4% may be "double" (if that's the number you want to go with), but it's not a huge difference. Some economists even think the target is too low, and 3% would be completely fine. On top of that 1) it takes time for all these interest rate hikes to give their full effect, 2) inflation is currently going down, 3) killing jobs just to get slightly closer to a magic number no one really knows is essential to achieve is odd. Inflation is already low and under control. Being alarmist about (not actually) 4% is odd.
- nostrademons 3y ago
  For reference, 2% inflation over 30 years is an 82% rise in prices. 4% inflation over 30 years is a 232% rise in prices. Many people underestimate the effect of compounding interest and how much of a difference rates of return make.
  - afterburner 3y ago
    Many people underestimate the effect of compounding unemployment.
    - nostrademons 3y ago
      Unemployment doesn't compound, though. The highest it can go is 100%, and in practice people have a strong incentive to get new jobs and make new jobs long before it reaches that point. Unemployment has a negative feedback loop: the more people who are unemployed, the more wages drop, which makes it more cost effective to employ people, which reduces unemployment. Inflation has a positive feedback loop: the higher prices rise, the more people need to hunt for raises to make ends meet, which means higher costs and even higher prices. Or alternatively, the more time they spend looking for new jobs, meaning less actual work done, meaning lower productivity, less output, greater scarcity, and higher prices. That was the big realization of the late 70s and early 80s. When the 70s inflation first got going in the late 60s, people thought "Eh, a little inflation is preferable to mass unemployment." By the end of the 70s, they'd learned that if you choose inflation, you get both, because people can't make prudent investments in the future if prices are not stable.
wayeq 3y ago
That's a pretty naive way to characterize the economic system, which is designed to include inflation in order to motivate participation in the economy. If you're hiding wads of cash in a suitcase under your bed, you either don't understand this or you've chosen to lock in reduced buying power year after year to avoid a greater loss due to a market collapse.
- nostromo 3y ago
  Rich people don't hide wads of cash in their mattress and aren't hurt by inflation. Poor people do live paycheck to paycheck, and often their paychecks lag inflation. And that's why inflation usually hurts the poor first and foremost.
bryanlarsen 3y ago
If the Fed and it's quantitative easing caused the problem, then you'd expect to see more inflation in countries with more easing and less in countries with less easing. There is a correlation between the amount easing and inflation, but it is very low, making it quite clear that the Fed was not the primary cause.
- voisin 3y ago
  Source?
  - bryanlarsen 3y ago
    It's a relatively easily falsifiable statement, so stop JAQing off.
- nostromo 3y ago
  Not really, finance is global now. Money printing in the US can and does drive up prices in China, and vice-versa.
  - bryanlarsen 3y ago
    Globalization of finance and trade strengthens the effect, it doesn't weaken it. If you double the number of dollars floating around compared to Euros, the dollar:euro exchange rate adjusts accordingly, so anything priced in dollars would now be ~50% cheaper in Europe.
imtringued 3y ago
Ah, yes, the classic "the Fed is supposed to micromanage everything". Aren't neoclassicals supposed to deny the influence of money on the economy?
drewcoo 3y ago
You'd need a 22% raise to make up for the dollar only being worth $0.82. .82 x 1.22 ~= 1 Or did I read that wrong?

drexlspivey 3y ago

More like the federal government causes massive problem and Fed comes to the rescue

nostromo 3y ago
Both were the problem. The Federal Reserve buying up 1.5 trillion dollars of mortgages around 2020, for example, surely contribute to housing cost inflation. https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
- jjoonathan 3y ago
  It was eye-opening to watch how the news reported the two prongs of stimulus. Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing. Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.
  - drexlspivey 3y ago
    That's because "Fire-hose of money aimed at rich people?" (I assume you mean QE with that) does not cause CPI inflation which is the main problem.

HPsquared 3y ago

Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.

mediaman 3y ago

I think it's unfair to pin this on the Fed. Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity. Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing. As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.

adam_arthur 3y ago
While I agree that fiscal stimulus, which drove excess demand and thus shortages was the primary culprit in inflation, the Fed deserves more blame due to having the ability to unilaterally make the decision to intervene, yet choosing not to. The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation. https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-makes-the-case-for-stimulus/ https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...
smileysteve 3y ago
Some of the volatility can be blamed on the Fed; It's a major component of the money supply that is less bureaucratic than congress. So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake. Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).

tekla 3y ago

"Firefighters cause massive water damage when fighting massive fire, news at 11"

nostromo 3y ago
Jerome Powell himself admitted they overdid stimulus, massively contributing to inflation.
- afterburner 3y ago
  Much better to overdo stimulus in a crisis and prevent a cratering economy (and human suffering) than the opposite. Stimulus is hard, politically, basically only possible at the peak of the crisis. Raising rates to undo it after you know the stimulus did its job is easy. Under-stimulating is what happened in 2008+ thanks to Republican obstruction and fear of electoral "anger", and we got years of extra suffering as a result.
- Analemma_ 3y ago
  But you also have to consider the counterfactual: we did way too little stimulus after the GFC in 2008, leading to the economy being depressed much longer than it needed to be. Obviously it would've been nice if we had done exactly the right amount of stimulus, and easy to armchair-quarterback in retrospect and say the "right amount" was obvious, but at the time it was not.

MuffinFlavored 3y ago

> Fed causes massive problem, and then eventually stops it from getting worse... Hooray? Was it the Fed or was it Congress through policy? Congress needed to do something in the response to the pandemic for the people, right? Therefore, why does Congress deserve blame? They helped people out, didn't they?

afterburner 3y ago

> Inflation is still twice the target rate at 4% First of all, the article says inflation is at 3%. Sounds like you're over-reacting here. 4% may be "double" (if that's the number you want to go with), but it's not a huge difference. Some economists even think the target is too low, and 3% would be completely fine. On top of that 1) it takes time for all these interest rate hikes to give their full effect, 2) inflation is currently going down, 3) killing jobs just to get slightly closer to a magic number no one really knows is essential to achieve is odd. Inflation is already low and under control. Being alarmist about (not actually) 4% is odd.

nostrademons 3y ago
For reference, 2% inflation over 30 years is an 82% rise in prices. 4% inflation over 30 years is a 232% rise in prices. Many people underestimate the effect of compounding interest and how much of a difference rates of return make.
- afterburner 3y ago
  Many people underestimate the effect of compounding unemployment.
  - nostrademons 3y ago
    Unemployment doesn't compound, though. The highest it can go is 100%, and in practice people have a strong incentive to get new jobs and make new jobs long before it reaches that point. Unemployment has a negative feedback loop: the more people who are unemployed, the more wages drop, which makes it more cost effective to employ people, which reduces unemployment. Inflation has a positive feedback loop: the higher prices rise, the more people need to hunt for raises to make ends meet, which means higher costs and even higher prices. Or alternatively, the more time they spend looking for new jobs, meaning less actual work done, meaning lower productivity, less output, greater scarcity, and higher prices. That was the big realization of the late 70s and early 80s. When the 70s inflation first got going in the late 60s, people thought "Eh, a little inflation is preferable to mass unemployment." By the end of the 70s, they'd learned that if you choose inflation, you get both, because people can't make prudent investments in the future if prices are not stable.

wayeq 3y ago

That's a pretty naive way to characterize the economic system, which is designed to include inflation in order to motivate participation in the economy. If you're hiding wads of cash in a suitcase under your bed, you either don't understand this or you've chosen to lock in reduced buying power year after year to avoid a greater loss due to a market collapse.

nostromo 3y ago
Rich people don't hide wads of cash in their mattress and aren't hurt by inflation. Poor people do live paycheck to paycheck, and often their paychecks lag inflation. And that's why inflation usually hurts the poor first and foremost.

bryanlarsen 3y ago

If the Fed and it's quantitative easing caused the problem, then you'd expect to see more inflation in countries with more easing and less in countries with less easing. There is a correlation between the amount easing and inflation, but it is very low, making it quite clear that the Fed was not the primary cause.

voisin 3y ago
Source?
- bryanlarsen 3y ago
  It's a relatively easily falsifiable statement, so stop JAQing off.
nostromo 3y ago
Not really, finance is global now. Money printing in the US can and does drive up prices in China, and vice-versa.
- bryanlarsen 3y ago
  Globalization of finance and trade strengthens the effect, it doesn't weaken it. If you double the number of dollars floating around compared to Euros, the dollar:euro exchange rate adjusts accordingly, so anything priced in dollars would now be ~50% cheaper in Europe.

imtringued 3y ago

Ah, yes, the classic "the Fed is supposed to micromanage everything". Aren't neoclassicals supposed to deny the influence of money on the economy?

drewcoo 3y ago

You'd need a 22% raise to make up for the dollar only being worth $0.82. .82 x 1.22 ~= 1 Or did I read that wrong?