Fed Chair Jerome Powell said clearly, in so many words, that reducing inflation would require pain.
Paul Krugman, who was enthusiastically “Team Transitory” before spiking inflation forced him to finally see reality, is already whining that the Fed should back off despite little evidence that inflation has receded.
by Paul Krugman, The New York Times Oct. 6, 2022
Recently I wrote about the growing buzz from economists and businesspeople to the effect that the Federal Reserve, which has been trying to slow the economy to fight inflation, is braking too hard. Since then the buzz has intensified. And I’m increasingly convinced that, despite a disappointing inflation report and what still looks by some measures like a robust job market, the Fed is getting behind the curve.
We are, I’d now argue, just starting to see the effects of the interest rate hikes the Fed has been making since early this year. Never mind what inflation and jobs data are saying right now; there’s a lot of reduction in inflationary pressures — and a lot of drag on output and employment — already in the pipeline. The economy, as some business analysts like to say, may well be “rolling over.”… [end quote]
What are inflation and jobs data saying right now? That “sticky inflation” is still rising and the job market, though slightly weakening, is still strong. Average hourly earnings climbed 5 percent from a year earlier, the Labor Department reported.
Looking ahead, Krugman sees clouds gathering, so he wants to “evacuate before the storm” by telling the Fed to pull back on its tightening policy. That’s exactly what Fed Chair Arthur Burns did in the 1970s when inflation kept roaring back.
We can expect lots of whining from Krugman. The screams of pain from Wall Street haven’t even begun in earnest. When zombie companies start defaulting when they can’t roll over their low-interest debts. When profits begin to drop even in solid companies.
Yes, there will be a recession. No, the recent bottom in stocks is not a true bottom – it’s only noise, not based on Macroeconomic trends.
My brother-in-law thinks that Powell will cave to the pressure, as he has before. But I think that Powell is fully aware of the spotlight of history on his legacy. He’ll hold firm, like Volcker.
I don’t intend to put money into the stock market until the “mungofitch 99 day rule” triggers – 99 trading days of new highs. The market of the 1970s had many violent head fakes that failed. The market didn’t reach bottom until 1982.
The whining has begun but it’s far from ending. The storm clouds are moving in. It’s not Hurricane Covid – people won’t die – but it will be nasty.
Be careful out there.