What is the Fed Waiting For?

Amidst the news that higher inflation has not begun to fade (CNBC), we can expect a slew of tales about how it’s all due to supply-chain disruptions caused by COVID, or rampant government spending, including expectations of future spending.

Some will even insist that the Democrats scale back their “Build Back Better” plans.

Oh, wait, that was me.

While the above explanations are not without merit, one culprit should not escape blame: the Federal Reserve.

I’ve spent all sorts of bandwidth insisting the Fed normalize interest rates. The COVID recession became a convenient excuse to keep rates at zero and turn on the money spigots via  massive bond purchases. That recession has long ended, but the mistaken Fed policy continues (CNBC, emphasis added)

Traders are now fully pricing in a first rate hike for September, but they are pricing in much higher odds that the Fed starts to raise rates sooner. The Fed has said it would complete tapering its bond buying program by the middle of the year, and then begin raising interest rates.

The middle of the year?!

Perhaps the Fed thinks the recent inflation surge is all about the supply chain and that the issues regarding it will be fixed by the summer. Even if they’re right, that isn’t enough reason by itself to keep rates at zero, and it certainly isn’t enough reason to keep buying bonds for at least half a year.

Interest rates were already too low before COVID hit. With its economic effect fading, rates are certainly too low now, even for reasons that don’t involve inflation.

Add high inflation into the mix and normalizing interest rates should be a no-brainer.

The COVID recession can no longer be an excuse for unnecessarily loose monetary policy. It is long past time for the Fed to stop the excess bond purchases and get interest rates back to normal levels.

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