BRIEFLY NOTED: 2022-03-14 Mo: Had the Fed known then what we know now about omicron-in-China and Putin's attack on Ukraine, it would have been wise for the Fed to have taken its feet off the gas a year or so ago? I think not. Facing these two new supply shocks from a position of a lower current inflation rate would have a small advantage. But the big difference between the impact of supply shocks hinges on whether they hit the economy when the economy has well-anchored inflation expectations vis-à-vis when the economy that has lost its nominal anchors. Thanks to Brainard and Powell, inflation expectations still look well-anchored to me. And whatever narrow advantage going forward would have been gained by having inflation at 4% rather than at 7% over the past year is vastly outweighed by the costs of having some 3 million people additional without jobs now and without jobs over the past year. The joker in the deck is that we do not know how far the Chinese government will go in continuing to pursue “zero Covid”, or how effective totalitarians-vs-viruses are going to be...
I think the Fed should have done in September what it did in November not out of perfect foresight about COVID/PUTIN, but becasue of TIPS. Now that PUTIN/COVID-China have hit, it should say that it will allow inflation to persist a while longer, but reiterate the determination to return it to 2%. [Or are we just in for more supply side shocks from here on and the target should be increased?]
TIPS expectations continue to exceed target. The 5 and 10 year rates (and why doesn't the Treasury create a 2, 3, 4, 7.5 TIPS?) may still be compatible with 2% +X% for Y years and target for years 10-Y to 10, but it's looking less likely.
I think the Fed should have done in September what it did in November not out of perfect foresight about COVID/PUTIN, but becasue of TIPS. Now that PUTIN/COVID-China have hit, it should say that it will allow inflation to persist a while longer, but reiterate the determination to return it to 2%. [Or are we just in for more supply side shocks from here on and the target should be increased?]
TIPS expectations continue to exceed target. The 5 and 10 year rates (and why doesn't the Treasury create a 2, 3, 4, 7.5 TIPS?) may still be compatible with 2% +X% for Y years and target for years 10-Y to 10, but it's looking less likely.