The Era of Federal Reserve Mistakes
Wall Street and the Federal Reserve have been wrong on a lot of things over the past few years, and now they Wrong about how high inflation will stay.
Our era of mistakes begins in 2021, when the Fed and Wall Street economists predict a spike in inflation. TemporaryTwo years later, Fed economists and officials largely agree with the financial sector’s view. recession It was almost inevitable. Recently, Fed officials have Interest rate cut This year, it was expected to reach $10 million, while Wall Street was expecting $5 million, but a resurgence of inflation in the first quarter of this year dashed those expectations.
Right now, Federal Reserve officials are full of optimism for us, We expect inflation to ease over the next two years.It aims to get rates back to the coveted 2% level by 2026. Wall Street sees this as unrealistic pessimism and is urging the Fed to cut rates as soon as possible to avoid “falling behind.”
Prediction drivers
Unpacking the fancy macroeconomic talk, these forecasts are driven by a near-perfect rise in inflation. It is entirely the result of certain factorsApart from the fiscal surplus, the excessive and prolonged monetary easing, the supply chain problems, the labor market imbalances, the savings glut, the rising energy costs, etc., these are all things of the past. Inflation should just go down. The goal is 2%.
But this optimistic outlook runs into harsh reality. Randall VerbruggeSenior research economist at the Cleveland Federal Reserve Bank. Recent PublicationsVerbrugge argues that reaching the 2% target will take the Fed well beyond its timeline due to the “inherent” tenacity of inflation. According to Verbrugge’s model, Inflation will hover around 2.7% by mid-2025By mid-2027, it will be just over 2%.
Verbrugge’s paper distinguishes between two forces behind persistent inflation. On the one hand, “External” The factors cited by those in favor of lowering interest rates, such as an overheated labor market or a supply shock, are now a thing of the past. “Essential” Inflationary forces driven by how people form future expectations, set prices and demand wages.
“One relevant theoretical mechanism is that higher inflation makes workers more likely to perceive that wage growth has not kept up with inflation, and therefore more likely to demand wage increases in line with recent inflation. This combination of perceptions and demand could trigger a wage and price spiral.” Verbrugge wrote (emphasis added).
The role of consumer psychology
In this context, it is helpful to remember the following: Inflation now weighs even more heavily on consumer sentiment A recent paper by Joan Xu, director of the University of Michigan’s widely followed Consumer Survey, found that inflation is now higher than it was before the pandemic. “Despite the weakening inflation, consumers continue to spontaneously comment on the negative impact of higher prices on their lives,” Xu wrote.
From a traditional monetary policy perspective, this is not all that worrying, as negative perceptions of inflation have not translated into persistently high inflation expectations. “Even as high prices, particularly for gasoline and food, continue to weigh in unique ways on consumers’ economic experience,” he said. Inflation expectations have eased “We will continue to lower policy rates in line with slowing realized inflation through the end of 2023,” Su wrote.
However, from the point of view of Verbrugge’s analysis, The inflation experience That is more important for the sustainability of inflation than expectations, which have traditionally been considered important.
At present, inflation is Underpinned by a high level of inherent sustainabilityAccording to Verbrugge, yes.
“Inflation is not going to bounce back to 2% very quickly without some external or internal pressure,” Verbrugge said in an interview with MarketWatch’s Vivian Lu Chen. “Inflation is not going to spike, it’s going to bounce back slowly. This highlights the challenge ahead for the Fed.”
Unless there are some external factors Disinflationary shockWith a productivity surge, a favourable supply shock and a slowdown, bringing inflation down to 2% is likely to be, in Verbrugge’s words, “the last half mile”. It will likely take several years.
