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Fed Watch: Controversy Dogs Monetary Policy As Inflation Continues To Surge

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewApr 18, 2022 04:51AM ET
www.investing.com/analysis/fed-watch-controversy-dogs-monetary-policy-as-inflation-continues-to-surge-200622334
Fed Watch: Controversy Dogs Monetary Policy As Inflation Continues To Surge
By Investing.com (Darrell Delamaide/Investing.com)   |  Apr 18, 2022 04:51AM ET
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Michael Burry, one of the investors featured in The Big Short book by Michael Lewis and the movie based on it, is not always right. He is famous for rightly anticipating the subprime mortgage crash and profiting from it, but he also shorted Tesla stock, which is a battle he lost.

However, Burry is one of those individuals harshly criticizing the Federal Reserve for not doing enough to fight inflation. In a tweet last week republished in Business Insider, Burry wrote:

“The Fed has no intention of fighting inflation. Serial half-point hikes are for getting elevation before stocks and the consumer tap out. Same with rapid fire QT.” [A reference to quantitative tightening as the Fed runs off its bond portfolio.]

The Fed, he goes on, “is all about reloading the monetary bazooka.” The central bank is going through the motions so that it will have the firepower to bail out the market when, not if, that becomes necessary. This is the famous so-called Fed put to limit declines in the stock market.

Persistent Fed critic Larry Summers, the Harvard economist and former Treasury Secretary, keeps hammering away at how the Fed’s targeted soft landing is illusory.

“I think the odds on a hard landing within the next two years are certainly better than half, and quite possibly two-thirds or more,” he said in a Bloomberg podcast last week. However high interest rates go to curb inflation, “at the end of the day, we’re going to see a fairly hard landing.”

More 'Aggressive' Central Bank?

The consumer price index for March showed a year-on-year increase of 8.5% after 7.9% in February and 7.5% in January—the highest levels in more than 40 years. And yet even a hawk like Cleveland Fed chief Loretta Mester maintained last week that policymakers will be able to have their cake and eat it, too. At a University of Akron event last week, Mester explained:

“Our intent is to reduce accommodation at the pace necessary to bring demand into better balance with constrained supply in order to get inflation under control while sustaining the expansion in economic activity and healthy labor markets.”

Lael Brainard, the designated vice chair of the Fed and a confirmed dove, was equally optimistic last week:

“The U.S. economy enters this period of elevated uncertainty with a very strong labor market and significant underlying economic momentum. And that, I think, bodes well for the ability to bring inflation down while also continuing to sustain the recovery.”

Whether the economy can maintain that momentum in the face of repeated rate hikes is the big question. Investors are counting on the Federal Open Market Committee to raise the policy rate by a half-point in May after its quarter-point hike in March, but critics contend that is not nearly enough to halt the surge in prices.

Black swan events like Russia’s invasion of Ukraine and new COVID-19 lockdowns in China are fueling inflation, underscoring how the Fed should have acted sooner to nip inflation in the bud when it first appeared last year.

The minutes from the last FOMC meeting, released earlier this month, talked about capping the runoff in the Fed’s bond portfolio at $95 billion a month. It would take several years to reach a significant reduction of the $9 trillion portfolio at that rate, let alone get anywhere near the pre-pandemic level, but many analysts decided this showed the Fed is turning more “aggressive.”

As Fed Chairman Jerome Powell awaits Senate confirmation for a second term and Brainard waits to get her vice chair title, President Joe Biden has named a replacement for the failed nomination of Sarah Bloom Raskin as vice chair for regulation.

Michael Barr, who occupied top Treasury posts in the Obama administration, is deemed to be more centrist than Raskin, but as an architect of the 2010 Dodd-Frank financial reform, he was instrumental in designing the Consumer Financial Protection Bureau maligned by conservatives.

His failure to speak out in favor of regulating banks on climate change may have cost him a shot at the comptroller of the currency regulatory job.

Nonetheless, he is likelier than Raskin to pass muster for the Fed regulatory post, which would bring the board of governors to its full complement of seven, presuming the two pending nominations for new board members are approved by the full Senate.

Fed Watch: Controversy Dogs Monetary Policy As Inflation Continues To Surge
 

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Fed Watch: Controversy Dogs Monetary Policy As Inflation Continues To Surge

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Comments (4)
Mohd Izhar Muslim
Mohd Izhar Muslim Apr 18, 2022 2:55PM ET
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Thank you for sharing the article 👍
Longevity Empire
Longevity Empire Apr 18, 2022 11:18AM ET
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Long story short there system is crashing down hill !!! They say all this ti keep you in a loop
IT Pro
IT Pro Apr 18, 2022 10:40AM ET
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Micheal Burry called Tesla top right. Stock fell 25% from 850 to 550. Unless you were thinking that M.Burry's call was valid for a lifetime.
Sam Iam
Sam Iam Apr 18, 2022 10:32AM ET
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Raising rates won't have any effect on government spending. They will still spend trillions. Oh well, it's the thought that counts.
 
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