Kudlow: Wednesday’s Fed announcements were dovish

First, we focus on inflation and today’s Fed meeting. Friends, I knew Paul Volcker. In fact, I worked for Paul Volcker at the New York Fed in 1975, and I can tell you that Jay Powell is not Paul Volcker.

He may invoke the name of the late Volcker and try to hide behind it, but if you look at Fed actions today, they don’t look like Volcker.

By the way, Mr. Powell has yet to be confirmed for a second term as Fed Chairman. Its new title is “chair pro tempore”. Some people call it “the transient chair”, as in “transient” inflation. To find? But I digress.


Federal Reserve Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee on May 04, 2022 in Washington, DC. (Photo by Win McNamee/Getty Images/Getty Images)

How do I know Jay Powell is not Paul Volcker? I watch the markets. The markets tell me that they are not afraid of Jay Powell’s so-called anti-inflation policy. Powell speaks, but he doesn’t walk.

The stock market is up over 900 points – no fear of tight money there. Gold is on the rise. The dollar is falling. Oil is up and interest rates have fallen.

The Fed’s target rate was raised 50 basis points to 0.75 to 1%, but ordinary traders already knew that. People say this is the biggest fund rate hike in two decades, but the problem is that we have the highest inflation rate in four decades. That’s what’s wrong with this picture. And Powell took future rate hikes 75 basis points off the table, which is a big mistake. Volcker would have kept them guessing, and Volcker knew that the Fed’s target rate had to be higher than the rate of inflation in order to defeat broad-based price increases.

The core inflation rate is around 8%. That would require a fed funds rate of 9% or 10%, or even higher in the days of Volcker’s shock and awe. Volcker has also held back money supply growth and here Powell has written off completely.

The Fed won’t begin to sell off its bond portfolio for another month and when it does, starting in June, it will only be $47.5 billion in liquidations of Treasuries and bonds. mortgages, not the $95 billion that people were expecting and the Fed had previously mentioned.

Indeed, relative to the inflation crisis, today’s Fed announcements were dovish, and that is why inflation-sensitive market prices like the dollar, gold, rates interest, oil and stocks all went bad.


Here’s a key point: as long as the Fed’s inflation-reduction policy proceeds slowly rather than quickly, it will prolong the inflation crisis for many years. Their only hope would be a very aggressive tightening right now. Raise the target rate, sell bonds from their portfolio.

There could be a mild recession next year. But the longer the Fed waits, the higher inflation interest rates will rise and a future recession and rising unemployment with it will be much, much worse.

Here is a key point: price stability is the foundation of economic growth. The dollars in your wallets and wallets should be worth more, not less. Hard work must be rewarded with higher, not lower, real wages.

Gasoline and food prices will only fall if the Fed really strengthens the dollar and returns to its inflation target of 2% or less. Going from today’s 8 to their 2 isn’t going to be easy, but again, the longer they wait, the harder the final landing will be.

Moreover, President Biden and Senator Chuck Schumer both want to roll back Trump’s tax cuts on the grounds that they lead to permanently rising deficits and that the wealthy have not paid their fair share.


Joe Biden

President Joe Biden speaks about the COVID-19 relief program in the State Dining Room of the White House, Monday, March 15, 2021, in Washington. (AP Photo/Patrick Semansky/AP Images)

Here is a bulletin: Higher taxes will aggravate the inflation crisis. They will hurt the supply side of the economy. Increased federal spending will also aggravate the inflation crisis.

The Mundell-Laffer policy adopted by Ronald Reagan was to reduce taxes and increase the value of the royal dollar. It launched a nearly three-decade-long prosperity. Trump followed Reagan’s playbook. Biden’s woke economics is completely bogus.

This article is adapted from Larry Kudlow’s opening comment in the May 4, 2022 edition of “Kudlow.”

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