ANOTHER DOSE OF DROXY?

The most dangerous part of any flight is the landing. That part of the flight where the plane makes its final approach--and the actual landing of the plane itself-- is where a disproportionate number of fatalities take place. According to a recent Boeing report, almost half (48%) of all fatalities occur during this part of the flight.

The pilot--as well as the passengers and crew members-- are obviously desirous of a landing in which no damage is done to the plane and, especially, where no harm is incurred by persons on board the plane. They want, in short, a soft landing.

As I write this brief post the Federal Reserve--aka, the FED-- is meeting in an effort to navigate the economy-- that plane or spaceship that we construct and board-- toward a safe landing. More specifically, the FED's Federal Open Market Committee (FOMC) is meeting and expected to jack up its benchmark interest rate to tamp down the rate of inflation.

I don't think anyone who follows this stuff believes that the FED will take a pass on the opportunity to raise the interest rate yet again. In fact, this will be the fourth rate increase this year. On March 17th and May 5th, the FED raised its benchmark interest rate by 25 and 50 basis points, respectively. Or, which is the same thing, by a quarter of percentage point (.25%) in March and a half of a percentage (.5%) in May. This was followed by two consecutive increases of three quarters of a percentage (.75%) in the months of June and July.

Tomorrow--September 21st, 2022-- or shortly thereafter, we're likely to get another increase. The odds are that that increase will be at least as large as the last two increases (.75%) or perhaps even as high as 100 basis points or full percentage point. There's a consensus that anything less than .75% is off the table. The FED is expected to go big.

Central to the FED's meeting, of course, will be the recent data released by the Bureau of Labor Statistics (BLS): Every metric of inflation is increasing. The Consumer Price Index (CPI) is the metric we hear the most about and, according to the BLS, it clocked in at an annual rate of 8.3%. Another measure, known as the core inflation rate, excludes the volatile categories of food and energy from its calculations. The BLS reports that that measure is rocking at a rate of 6.3%.

Anyway you cut it, prices are increasing at a rate that we haven't seen in four decades.

And the FED is making it abundantly clear that they will continue to increase their benchmark interest rate until inflation is under control and moving back toward the goal of a 2%-2.5% annual rate. Furthermore, Jerome Powell, the chair of the FED, is convinced that's possible to do this without inflicting any significant economic damage. He's convinced that although increased interest rates will choke off borrowing and spending and cool the economy down, it's possible to fight inflation via increased interest rates without inflicting any appreciable economic damage. He's convinced that this strategy can be pulled off without generating elevated levels of joblessness.

He thinks we can have a soft landing.

WHY THE LANDING IS NOT LIKELY TO BE SOFT

There's a basic flaw in much of the discourse about the current bout of inflation, and this flaw is just one of the reasons why the FED'S monetary policy response is much more likely to eventuate in a hard, not a soft, landing. In fact, the Fed's strategy of persistent and large rate increases will not only end up increasing unemployment but, furthermore, will not have nearly as much of an impact on inflation as they imagine.

The problem is that much of the FED'S theorizing and practical responses to inflation is predicated upon the faulty assumption that the inflation we're witnessing is largely or primarily being driven by "excess" demand.

It's because of this supposedly excess demand that there's all this hype on increasing the benchmark interest rate. Because, as mentioned above, increased interest rates will slow down both borrowing and spending, the FED--along with a number of pundits and professional economists-- is exactly the medicine that the "patient" needs.

But, as economist Stephanie Kelton notes, the "FED's rate hikes are the Hydroxychloroquine of inflation."

It's economic "droxy" because it's not likely to work, and it's not likely to work because supply is primarily driving inflation, not demand. Prices are being hiked up because of such things as disruptions in the global supply chain, housing shortages, rising costs of transport, profiteering by corporations who've used the pandemic to boost prices far beyond cost incurred and, of course, the now war in Ukraine.

Economists Yeva Nersisyan and L. Randall Wray make a compelling case, I think, that inflation is now being driven by supply issues and not, as the FED assumes, by excess demand.

If this is accurate--and I think the evidence suggest that it is-- then the upshot is clear and bears repeating: The FED's strategy will have limited impact on inflation because it fundamentally misdiagnoses what's driving it. Its entire response is pretty much being framed by the misguided notion that this bout of inflation is a matter of "too much money chasing too few goods."

Nothing could be further from the truth.

But here's what the FED's strategy of persistent rate hikes can end up doing: Jacking up joblessness, with the impact being particularly pronounced on the very groups that got slammed by the health and economic hell unleashed by the gross mismanagement of pandemic by an authoritarian regime more devoted to ideals of White nationalism than to the livelihood of the citizenry.

Just think about it.

After all we've been through in the last couple of years, we're now at a point where the central bank is committed to a strategy that will have a relatively limited impact on inflation but could have a huge one on joblessness.

High levels of inflation and joblessness.

Right now, though, I'm going to hit a beer, go to bed, and see what Jerome Powell got for me tomorrow.

I'm thinking it's more droxy.