Powell votes for more inflation

Yesterday, April 22, Chairman Powell reiterated his increasing concern with rising inflation, but again his actions belie his words.  He allowed that the FOMC "could consider an increase of 50 bps at the May meeting (May 2-3), but that decisions are made at the meeting, and meeting by meeting."  Once again, Powell failed to deliver a clear roadmap to the market of the Fed's interest rate policy.   

As an economic fact, the Fed remains in a stimulating posture until the short term rate reaches the "neutral" rate, assumed to be over 2%.  At the moment, the rate stands at 0.5% and even with a 50 bps increase will still be only 1%.  The result is further simulation of inflation perhaps through the summer.  Even after reaching neutral, presumably, the Fed will have to at least gently restrain the economic in order to restrain inflation (the "soft landing").  If this is to be achieved, the Fed Funds rate would have to reach closer to the neighborhood of 3%.  Again, when will the Fed get to that point?  If it is not until late 2023, as indicated in the last Fed minutes, inflation can be expected to gain force through all of 2022 and most of 2023.  I am not an economist but this seems unwise. 

Further, the FOMC and Powell have not made any definitive statement about Quantitative Tightening.  The minutes suggest 90B per month will be allowed to roll off the Fed's balance sheet.  While one could debate the apprpriate size of the Fed's balance sheet, clearly $9T is too high.  At the rate of $90B per month or a little over $1T per year, it would take 7 years to reduce the Fed's balance sheet to the pre-pandemic level.  

Another economic fact: the markets will do some/all  of the work of the Fed and increase rates through the yield curve IF (note the capital letters) the path, and ideally, the destination, is communicated clearly.  However, we have had a complete absence of clarity.  As a result, the market remains highly volatile surging in one direction or the other based on threads of perceived information.