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How The U.S. Made Inflation Worse - YouTube
Channel: CNBC
[2]
Prices keep rising in
America, and policymakers
[5]
are asking how the central
bank could let this happen.
[7]
Forward guidance I think
overall slowed the response
[11]
of the Fed to the inflation
problem last year.
[14]
Investors think more price
increases are coming.
[17]
By the Fed's count of
inflation expectations,
[19]
prices will have risen an
additional 6.8% by the
[23]
summer of 2023.
[25]
It turns out that the
Federal Reserve might hold
[27]
some of the blame.
[28]
It is going to be very
challenging.
[30]
It has been made
significantly more
[32]
challenging by the events
of the last few months.
[35]
We need to make sure that
the central bank is on the
[37]
side of everybody in the
country.
[39]
The big concern is that not
only will we have these big
[42]
increases in inflation this
year, but that will lead
[45]
people to expect higher
increases in the future.
[48]
Because if that's the case,
it sort of compounds upon
[51]
itself.
[52]
We could be headed to
stagflation. Might get
[54]
better, but it might get a
whole lot worse.
[56]
And if it gets a whole lot
worse, brace yourself for
[58]
uncertainty.
[60]
How did the U.S. government
misread inflation and what
[63]
does this mean for people
in the United States?
[68]
The Federal Reserve is
America's central bank.
[71]
The job of the Federal
Reserve is to safeguard the
[75]
buying power of the dollar
and to make interest rate
[78]
policy in the public
interest.
[81]
They're supposed to
minimize inflation, maximize
[84]
employment.
[84]
It does this by working with
retail banks that Americans
[87]
use. Think Chase, Bank of
America, Wells Fargo, etc..
[92]
Banks have an account at the
Fed the way you have an
[94]
account at a bank, and the
Fed takes that money and
[98]
invests it in Treasury
bills, mortgage backed
[100]
securities, and pays the
bank a little bit of
[101]
interest.
[102]
The Fed manages the U.S.
[104]
money supply. Their
decisions can have a large
[107]
economic impact, but some
believe that Congress's
[110]
actions within the economy
are much more important.
[113]
The Federal Reserve needs to
be reformed.
[116]
The Federal Reserve needs
individuals who are on the
[119]
receiving end of monetary
policy, not individuals who
[124]
are only PhDs in economics,
who've never held a job in
[126]
the real world and have a
penchant for life and are
[129]
not affected by zero
interest rate policy making
[132]
life more difficult for for
savers who don't have a
[135]
public pension for life.
[136]
The Fed's job is
complicated. It involves
[139]
making predictions about
the future, things like, How
[142]
much will inflation be a
year from today?
[145]
And if it's up, what should
we do about that?
[148]
Experts believe the U.S.
[149]
central bank has made
important decisions that
[152]
drove better outcomes
throughout history.
[154]
Supporters point to the
Fed's strong provisions of
[156]
credit during the 2020
recession.
[159]
This cash ultimately kept
millions of people afloat as
[162]
the world locked down.
[163]
Also, the bank achieved a
balance of low inflation,
[166]
cheap lending rates and low
unemployment for the better
[169]
part of three decades.
[170]
This stability minimized
price increases while
[173]
supporting the creation of
many jobs.
[176]
But occasionally mistakes
are made.
[180]
The forward guidance, I
think overall on the margin
[184]
slowed the response of the
Fed to the inflation problem
[188]
last year to some extent.
[191]
So does that mean it was a
mistake? I think in
[193]
retrospect, yes, it was a
mistake and I think they
[195]
agree it was a mistake.
[196]
So here are the three big
mistakes.
[198]
The first was a sharp
increase in the money
[200]
supply. In recent years,
the overall pot of cash in
[203]
the Fed's control has grown
sharply.
[206]
Changes in the money supply
can take months or even
[208]
years to materialize within
the economy.
[211]
If the same amount of goods
existed in the economy, but
[214]
there was twice as much
money, then we would think
[216]
that the price of
everything would double.
[219]
This sharp increase
initially showed up in the
[221]
savings accounts of regular
Americans before they
[224]
quickly vanished.
[225]
Well, from everything that
we've seen, that money is
[228]
concentrated in the hands
of the oldest and the
[231]
wealthiest Americans.
[233]
What has stuck around is a
fierce upward spiral in
[235]
prices for goods.
[237]
As this dynamic took hold,
the Fed kept adding dollars
[240]
to the money supply,
primarily by printing and
[243]
issuing bonds that some say
the market didn't need.
[246]
The result was the sharpest
bout of inflation observed
[249]
in more than four decades
in the States.
[251]
Similar dynamics unfolded
around the world, bringing
[254]
forth a historic new
inflationary era.
[256]
Very few households, if you
will, ever got to enjoy the
[262]
benefits of zero interest
rate policy.
[265]
Only your biggest
borrowers.
[267]
Now on to mistake number
two.
[268]
When it started to raise
interest rates, the bank was
[271]
doing so at way too slow of
a pace.
[275]
The Central Bank uses its
federal funds interest rate
[278]
to counteract this high
level of inflation.
[280]
Their models suggest that
if this interest rate goes
[283]
up, that will make
inflation go down.
[285]
That's exactly what they're
trying to do now.
[288]
The Central Bank waited
until March 2022 to flip the
[291]
switch and make lending
more expensive.
[294]
They started with quarter
percentage rate hikes and
[296]
have since made bigger
hikes. This fast pace of
[299]
lift off is a start of a
sharp reversal from the past
[302]
three decades of policy.
[304]
So the Federal Reserve
maintaining record low
[306]
interest rates for a long
period of time sort of led
[309]
to some of the largest
asset bubbles that we ever
[312]
saw. And people who had
money sort of going into the
[315]
crisis and were able to
deploy that capital into the
[319]
stock market, into the
housing market, have done
[322]
extraordinarily well as a
result of the Fed's
[324]
policies.
[325]
The final mistake here was
that the Fed waited too long
[328]
to act at all.
[329]
Early signs of inflation
took hold for months before
[331]
the Fed took action.
[333]
For example, fuel was up
more than 50% in November of
[337]
2021. Even prices for used
cars were up over 30% year
[342]
over year in the same time
frame.
[344]
This was happening as the
Fed kept its interest rates
[346]
near zero and kept buying
massive amounts of bonds.
[350]
At the time, the bank
called inflation transitory,
[353]
hoping it would pass.
[354]
So far it hasn't.
[356]
As Chair Powell indicated
himself, both of us probably
[361]
could have used a better
term than transitory.
[365]
But the Federal Reserve
wasn't the only group that
[367]
made mistakes during this
time.
[369]
Economists believe that the
federal government played a
[371]
very large role in this
inflationary spiral too.
[374]
Fiscal policy is made by the
Congress and the president,
[377]
and that involves taxation
and spending.
[380]
And that's different from
monetary policy because it
[382]
really affects the amount
of money that is going to be
[385]
in your pocket, whereas
monetary policy works
[388]
through the banking system.
[389]
So some of the record
fiscal stimulus that we saw
[392]
coming out of the COVID
recession were expanded
[396]
unemployment insurance
checks, the general checks,
[399]
the enhanced child tax
credit.
[401]
All of those were examples
of fiscal policy to try to
[404]
get the economy recovered
as quickly as possible.
[407]
Economists like the famous
Milton Friedman believed
[409]
that inflation comes from
changes in the money supply.
[412]
Most of the episodes Milton
Friedman looked at were
[415]
times when governments
which were in deep problems
[419]
printed money and handed it
out.
[420]
So if you remember nothing
from this, remember one
[422]
thing: if you print money
and hand it out, drop it
[425]
from helicopters, as
Friedman said, you will get
[428]
inflation.
[429]
The current Federal Reserve
Board keeps track of the
[431]
supply in a publicly
available data set.
[433]
See the sharp uptick in
2020?
[435]
This money went directly
into the hands of actual
[438]
people who spent it, saved
it or invested the funds.
[441]
That creates a fierce rush
of demand.
[444]
And, at the time, it was
outpacing supply of the
[446]
goods available, possibly
creating inflation.
[448]
A lot of that money went
into emergency COVID bills
[451]
like the American Rescue
Plan. The government was
[453]
able to spend cash it
didn't have because it got
[456]
huge loans from the Fed.
[458]
And printing money to spend
it, printing money to hand
[460]
it out, printing money to
make transfer payments,
[463]
that's exactly what our
government did in the last
[466]
two years of the pandemic.
[467]
It's technically not
printing money, but it's,
[470]
from an economic point of
view, the same as printing
[473]
out money and handing it
out.
[475]
And it causes inflation.
[476]
So that is both monetary
and fiscal policy.
[480]
The next time there's a
handout, don't be so easy to
[483]
take it. Just bear in mind
what got us here.
[485]
And that was overly
intrusive and aggressive
[488]
fiscal policy that was
monetized by the Federal
[491]
Reserve.
[494]
Outside of its own missteps,
the government's fight with
[496]
inflation was accelerated
by various things outside of
[499]
their control. Economists
call these events black
[501]
swans. In the 2020s, these
so far have included:
[505]
COVID. Supply chain
disruptions.
[507]
Full scale invasion by
Russia into Ukraine.
[510]
But when the U.S. government
needs someone to respond to
[512]
these events, they turn to
their Federal Reserve and
[515]
whatever the Fed decides to
do will then reverberate
[518]
worldwide. That's because
many businesses settle
[520]
transactions with U.S.
[522]
dollars, which the Fed
controls.
[524]
So there is a massive
transmission mechanism that
[527]
transmits U.S.
[528]
monetary policy to the rest
of the world.
[531]
80 some odd percent of all
transactions in the world
[534]
are done using the U.S.
[535]
dollar and Fed policy
influences and dictates
[539]
where the U.S. dollar is.
[540]
So whatever we do is not
contained within the United
[545]
States economy.
[546]
It affects the global
economy.
[549]
Dealing with these
unexpected shocks is quite
[552]
difficult as the Fed wades
through other unknowns.
[555]
As inflation took hold,
some voting seats at the Fed
[557]
stayed open. And making
matters worse, a key member
[560]
was forced to resign in
what some believe was an
[563]
insider trading scandal.
[565]
Other voting members like
Michelle Bowman warned of
[567]
the danger of excess
inflation, but went unheard
[570]
in the committee chambers.
[571]
The Federal Reserve Board is
a massive organization full
[574]
of staff who need to know
who's my leader going to be.
[578]
And Randy Quarles said
publicly, had there not been
[582]
that level of internal
uncertainty and strife, that
[586]
the Fed would have been
raising rates last year when
[589]
it knew policy had become
problematic, especially as
[593]
it pertains to the housing
market, which is the only
[596]
form of inflation right now
that is in the Fed's
[599]
control and it looks like
they're trying very hard to
[601]
break.
[603]
Given that's the situation,
it seems like the Fed's
[606]
decision to continue to
prop up the market was
[609]
misguided because that sort
of added fuel to the
[612]
inflationary fire that
we're currently dealing
[614]
with.
[616]
Economists believe that the
Fed now has less ability to
[619]
get things back on track
without sparking a
[621]
recession. It's still
possible, though.
[624]
To do that, they'll need to
rapidly increase lending
[627]
rates to what economists
call a neutral interest
[629]
rate, one where the economy
is neither growing or
[632]
shrinking too quickly.
[634]
The neutral rate is a real
interest rate.
[637]
It doesn't matter if the
neutral rate is 3%, that
[640]
means something very
different if inflation is 8%
[643]
versus if inflation is 2%.
[646]
If inflation is going to be
high and remain higher, that
[649]
means that the neutral rate
in the economy is also going
[652]
to be higher. Because the
price of goods are going
[655]
up, we need a higher return
to stabilize the economy.
[660]
If we were actually
measuring inflation in a
[662]
consistent manner, the
peaks in the seventies and
[665]
eighties are actually much
more similar to the peak
[668]
today than we would have
initially thought.
[670]
Still, the stories of the
past could be relevant
[672]
material for today's class
of central bankers.
[675]
While the mistakes are far
and few between, they can
[678]
have a profound impact.
[679]
And for the record, their
good calls can make a big
[682]
impact too.
[684]
If they hold steady and are
committed to breaking
[687]
inflation, as was the case
with Paul Volcker, then
[691]
we'll get to the end of
this situation of pain
[695]
quicker than if they were
to try and draw out,
[698]
postpone, delay the
inevitable.
[701]
So I think at this point
the Fed has to stick to its
[704]
guns, even if that means
taking speculators down.
[708]
And that really is what has
scared the Fed in the past.
[712]
The Federal Reserve is
supposed to make monetary
[714]
policy in the whole of the
public's interest, not just
[718]
that of investors.
[719]
And this is going to be a
test of which they have not
[723]
really had to take since
1981.
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