The Federal Open Market Committee today announced a 75 bp hike in the Fed funds target. It’s firm but not out of line with expectations. The FOMC clearly wants to establish credibility in quelling inflation without capriciously rocking markets. As a long time harsh Fed critic, it feels strange to be defending the committee, but I’m gonna have to give Powell & Company high marks on this one.
We can always quibble. We’d have preferred 125bp, along with a clear statement to the effect of “that’s all, folks” … “we’ll review the rate at each subsequent point and either hike, cut or hold as the data warrant at the time”. It could even ease up on the balance sheet trimming, cutting only non-Treasury securities. Of course the committee has kind of made such things difficult by conditioning the markets for years to expect only the expected. We’re still seeing excessive reliance on foolhardy forward guidance, but at least we’re also seeing concrete action, a step in the right direction.
So as a practical matter our ideal move may be a bit of a fantasy. But as long as we’re going down that road, we have to reiterate that the best rate policy is none at all. In contrast to many Fed critics, I don’t have much of a problem with QE, confined to Treasuries and gold, and would prefer to see it completely replace rate targeting as the Fed’s marquee policy tool. Probably because it’s been done so long, rate targeting has become accepted as normal, but that overlooks the incalculable damage it has inflicted on the economy.
Setting interest rates, arguably the most important prices in the world, is too big of a job for one committee of people, no matter how smart they are. History proves it, and the current economic mess adds an exclamation point.
A simple check on progress is provided by the stock market. lf it starts taking off again, the Fed will have more work to do. We have more sophisticated tools as well. As we said just this morning, The FDI shows clear progress on inflation, and all the Fed need do is not undo it. Get Fed funds into line with the rest of the yield curve now and stop talking about what you’re gonna do later.
That’s what future FOMC meetings are for.