After the 75-bps rate hike last week, Powell took to the stage, saying in just his third sentence:
We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.
The public can hardly feel confident in this. When taking the Fed’s latest median projection of Personal Consumption Expenditure (PCE) inflation, they don’t project seeing 2% inflation until some time after 2024, in the longer run, per below:
The expectation is that PCE inflation will peak this year and will level off back to 2% in the long run… of course, why they believe this and what data, if any data, they are using to arrive at these projections is beyond the knowledge of anyone outside of their top experts.
Future inflation is not all they predict. There is also the Fed’s dot plot chart, used to guide future interest rates:
According to participants, rates still have a long way to go, possibly reaching over 3.5% this year. That’s not even the expected height of it, as, in 2023 rates may well be into the low 4% range. It’s only after 2024 rates are expected to be back around 2%.
As far as future outcomes for GDP and employment, the Fed predicts things will be quite all right for the foreseeable future:
No negative GDP is forecasted from 2022 and into the long run, while the unemployment rate is expected to persist around its current levels, from now and also past 2024.
Something eerily absent from all these predictions is any sense of a market downturn, or a recession. Even without employing lessons from the Austrians, or using ideas about the boom-bust cycle, one would think that the Fed’s shrinking of the balance sheet should give some cause for concern.
To go from a $5 trillion increase in the balance sheet in two years, to monthly decreases is no easy task. Even in my previous article I showed a visualization of the Fed’s holdings of US treasuries and how the last two times the Fed reduced holdings corresponded with a market crash and recession. Given the state of the world, the already high prices we’re seeing, and the Fed tightening to come, one would think a less than optimistic outlook would be reflected in their projections.
The problem with projections is that anyone can make them; however, there is a reason why the Fed’s projections are so detrimental. In the private sector, the entrepreneur must make predictions, forecasts and estimates all the time. They must anticipate future costs, sale prices, quantity demanded, consumer appetite, and countless other factors. They perpetually navigate a world of uncertainty. When the entrepreneur fails, the loss is borne by the entrepreneur first and foremost.
This is the opposite of how the Federal Reserve operates. When their predictions, forecasts, and policies are wrong, the errors, mistakes and failures are borne by society as a whole.
Should PCE inflation be twice, three times, or even five times higher than 2.6% in 2023, the Fed will explain why their forecast was wrong and revise accordingly. Unlike the entrepreneur who risks their own livelihood brining a product to market, weighed against the risk of going bankrupt due to potential failures, the Fed will not go bankrupt no matter the failure. In fact, not only will the Fed not go bankrupt, they’ll use any crisis as justification for more money printing endeavors, enriching themselves and those closely connected first and foremost.
