\n<\/div><\/div>\n<\/div>\n<\/div>\n

By Paul Davidson<\/div><\/div>\n

Study says: If the U.S. central bank had acted in early 2021, inflation would be down about a percentage point, but unemployment would be up 2 percentage points.<\/span><\/span><\/span><\/p>\n<\/div>\n

SAN FRANCISCO \u2013 Did the\u00a0Federal Reserve\u00a0make a historic blunder by not starting to raise interest rates early last year to fight inflation? And if so, how bad a mistake was it?<\/span><\/span><\/span><\/p>\n

Not so bad, according to a paper by the\u00a0Federal Reserve Bank of San Francisco\u00a0released Tuesday.<\/span><\/span><\/span><\/p>\n

In the study, the San Francisco Fed argues if the\u00a0U.S.\u00a0central bank had acted in early 2021, inflation would be about a percentage point lower than it is today, but unemployment would be 2 percentage points higher.<\/span><\/span><\/span><\/p>\n

\u201cThe main effect of earlier action by the (Fed\u2019s policymaking committee) would have been slightly lower inflation at the cost of a substantially higher unemployment rate,\u201d Regis Barnichon, a senior research adviser at the San Francisco Fed, wrote in the study.<\/span><\/span><\/span><\/p>\n

The Fed, the paper says, likely would have raised rates just moderately because it would have been mindful of its \u201cdual mandate\u201d to achieve both price stability and maximum employment, especially as the nation was still emerging from the deep recession triggered by the COVID-19 pandemic.<\/span><\/span><\/span><\/p>\n

The San Francisco Fed, along with the 11 other regional Fed banks, operate independently but under the\u00a0Federal Reserve\u2019s\u00a0supervision.<\/span><\/span><\/span><\/p>\n

Fed officials have been widely criticized for calling the inflation surge \u201ctransitory\u201d for much of last year, contending it was caused by pandemic-related supply chain bottlenecks that soon would ease. As a result, they kept the Fed\u2019s key short-term interest rate near zero to spur economic activity and lower unemployment, which peaked at 14.7% in\u00a0April 2020\u00a0and still stood at an elevated 6.2% in early 2021.<\/span><\/span><\/span><\/p>\n

Inflation, meanwhile, was starting to creep up, with a core measure \u2013 which excludes food and energy items \u2013 rising from 1% in\u00a0July 2020\u00a0to 2.3% in\u00a0March 2021\u00a0before peaking at 6.2% this past February.<\/span><\/span><\/span><\/p>\n

Since the Fed was assailed for being behind the curve, it\u2019s now hiking rates too sharply to tame inflation, according to many economists, and likely tipping the economy into recession by next year.\u00a0The Fed\u00a0has hoisted the federal funds rate by 3 percentage points in 2022 after its third straight hike of three-quarters of a point in September. It expects the rate to close out 2022 at about 4.4%.<\/span><\/span><\/span><\/p>\n

\u201cThey\u2019re going from one extreme to the other,\u201d says\u00a0Joseph LaVorgna, chief economist of\u00a0SMBC Nikko Securities.<\/span><\/span><\/span><\/p>\n

The Fed\u00a0hasn\u2019t been the only target of criticism for the price surge.\u00a0Republicans, among some top economists, also blame President\u00a0Joe Biden\u2019s\u00a0$2trillion\u00a0American Rescue Plan in early 2021 for distributing big checks to households, which goosed consumer spending and further strained supply chains.<\/span><\/span><\/span><\/p>\n

Yet the San Francisco Fed paper addresses only the Fed\u2019s role in the episode.<\/span><\/span><\/span><\/p>\n

Barnichon argues that even if the Fed could foresee the current price spike, it likely would have raised its federal funds rate by about a percentage point immediately and another percentage point by early 2022, leaving the rate at about 2% early this year instead of near zero.<\/span><\/span><\/span><\/p>\n

Separately,\u00a0Mark Zandi, chief economist of Moody\u2019s Analytics, agrees the appropriate federal funds rate early this year in light of the Fed\u2019s dual mandate was 2%.<\/span><\/span><\/span><\/p>\n

Under that scenario, Barnichon writes, core PCE inflation now would be about 4.8% \u2013 still well above the Fed\u2019s 2% target \u2013 instead of the current 5.8% while unemployment would be about 5.5% rather than today\u2019s 3.5%, which matches a 50-year low.<\/span><\/span><\/span><\/p>\n

In other words, inflation would be less virulent at the cost of fewer people working and a weaker economy.<\/span><\/span><\/span><\/p>\n

\u201cThe Fed\u00a0was too slow to begin raising the federal funds rate\u201d and that was partly responsible for raising consumers\u2019 inflation expectations, which in turn led to sharper wage growth and inflation, Zandi says.<\/span><\/span><\/span><\/p>\n

But, he adds, \u201cit\u2019s inappropriate to be overly critical of the Fed\u2019s slow response, given the heightened uncertainties caused by the pandemic and the Russian invasion of\u00a0Ukraine. It\u2019s easy to be a Monday morning quarterback.\u201d<\/span><\/span><\/span><\/p>\n

If the Fed has acted sooner, the federal funds rate would be a half to three-quarters of a point lower by early next year than currently forecast, Zandi estimates.<\/span><\/span><\/span><\/p>\n

LaVorgna disagrees, saying, \u201cWhen the emergency is over, you take away emergency policy,\u201d adding that\u2019s what the Fed historically has done.<\/span><\/span><\/span><\/p>\n

By doing so, he argues, the Fed may only have had to boost its key rate to about 2.5% by now and then paused. A more temperate rise in interest rates could have made for more stable financial markets and avoided perhaps about half of this year\u2019s 24% plunge in the S&P 500 index, LaVorgna reckons.<\/span><\/span><\/span><\/p>\n

He also disputes that unemployment would be notably higher than today\u2019s 3.5% and believes inflation would be more than a percentage point lower, though he wouldn\u2019t be more specific.<\/span><\/span><\/span><\/p>\n

In his paper, Barnichon says that economic models during the current period are highly uncertain.<\/span><\/span><\/span><\/p>\n

<\/p>\n

\n X<\/span>
\n
\n ADVERTISEMENT<\/span> <\/p>\n

<\/p>\n

<\/p><\/div>\n<\/div>\n<\/section>\n

<\/p>\n

Go to Source<\/a>
\nAuthor: marlam<\/p>\n","protected":false},"excerpt":{"rendered":"