Just before the 2022 midterms, I wrote that more rate hikes were coming. But to kick off the year, we started hearing that inflation was fixed. The Federal Reserve began to change its tune. It turns out the change of heart was wrong, and we're back with reality: more rate hikes are coming.
We've received a bevy of data in 2023 pointing to one simple fact: inflation is still running hot. Fed Whisperer Nick Timiraos is highlighting hawkish quotes from Federal Reserve officials again. Timiraos led with this line, "The Federal Reserve will need to raise rates to higher levels than previously anticipated to prevent inflation from picking up if the recent strength in hiring and consumer spending continues."
Fed governor Christopher Waller is the official in question. He further added, "wishful thinking is not a substitute for hard evidence in the form of economic data. After seeing promising signs of progress, we cannot risk a revival of inflation." It's not just that we're in hawkish territory again. People use terms like "wishful thinking" to describe formerly positive news. The times are changing.
But it's not just the Fed Whisperer and the Federal Reserve officials that talk to him. Jason Furman, former chairman of Barack Obama's White House Council of Economic Advisers from 2013-17, wrote an op-ed in the Wall Street Journal calling for a more aggressive Federal Reserve.
Furman comes out swinging at the Fed. He starts, "The Federal Reserve has said repeatedly that it responds to data and doesn't set interest rates on autopilot. The data have changed dramatically." But most importantly, he sets an aggressive agenda for the Federal Reserve:
The Fed should prove it means what it says by shifting from a 25-basis-point increase at its next meeting to a 50-point increase. It should also shift expectations toward a terminal rate of around 6%.
For reference, in December 2022, the Federal Reserve's projections didn't see interest rates going higher than 5-5.5%. Several Fed members thought rates wouldn't go beyond 5% that much. Furman calls for rates to approach 6%, a whole point higher than projections. It's a shocking pivot.
I'm noting Furman's opinion because this is not some partisan take. This is a former top Democratic economist saying that the Federal Reserve is not going far enough. He ends by saying, "Too many analysts have focused on what is possible for the economy rather than what is probable. Yes, a soft landing is still possible, but it remains improbable."
When an economist says a soft landing is possible but improbable, he's saying recession is coming. In truth, there's very little difference between a mild recession and a soft landing. It's a wordplay with little substantive difference. If people lose jobs and unemployment increases, the average person will call that a recession.
Furman isn't alone. Mohammed El-Erian, the chief economic adviser at Allianz and former chair of Obama's Global Development Council from 2012–17, sounded similar. On CNBC, El-Erian said the Federal Reserve was falling behind again, making another policy mistake in missing inflation. He warned, "Every time [The Fed] falls behind, the probability of the Fed tipping the economy into recession goes up."
In short, the hawks are back. January's optimism that the worst of inflation was behind us is gone. Inflation is going up again, and some of the most listened-to economic minds in the world are telling the Fed to hike rates faster. Lawrence Summers, one of the most consistent financial hawks, warned that recession is "inevitable."
Summers added, "There is no real historical precedent for the idea of a managed disinflation from current levels without recession." The warning signs from before the midterm elections are back. Inflation warning gauges are flashing red everywhere. The bump from the midterms is gone, inflation has returned, and economists are scrambling.
In an editorial, the Wall Street Journal wryly remarked, "it's worth noting that many of the same folks who claimed that inflation was 'transitory' in 2021 have been declaring premature inflation victory in recent months. Better to keep fighting until the enemy finally surrenders."
Some hawks have suggested we're back at step one at the Federal Reserve. The Fed let financial conditions loosen during the election - draw your own conclusions here. And now that reality is setting back in, with a debt cliff crisis staring everyone down, inflation is reminding everyone that it's here to stay.
We haven't solved inflation. Even Paul Krugman is worriedly telling his readers that, hopefully, Biden's infrastructure is behind us (spoiler alert - it's not, the stimulus train is only starting). The hawks are back in charge now, and rate hikes are headed higher. January was a mirage in the desert.
Settle in for more economic pain.