The Fedís Risky Fill-the-Punch-Bowl Strategy

Growth is surging, the housing market is hot, and inflation is on the rise. Itís time to pull back.


By Kevin Warsh, The Wall Street Journal (WSJ)

June 7, 2021


Warsh, a former member of the Federal Reserve Board, is a distinguished visiting fellow in economics at Stanford Universityís Hoover Institution.


My mentor, the late George Shultz, would often say ďan economistís lag is a politicianís nightmare.Ē Changes in economic policy take several quarters to affect the real economy. Politicians usually arenít that patient.


The Federal Reserve announced a new policy doctrine almost a year ago. In essence, the Fed said it would no longer consider lags when making monetary policy, forsaking the policy of ďpre-emptionĒ that was standard under Fed heads Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen. Jerome Powellís Fed believes the party is just getting started and wonít remove the punch bowl until the fun is in full swing and the neighbors know it. Most in Washington can barely contain their enthusiasm for the new doctrine. Wall Street loves it too.


Optimism about the future, however, should be matched by memories of the past. Real economic growth is surging more than it did during the Reagan years. U.S. government spending is growing at the fastest clip since World War II. The housing market is running hotter than it did in the runup to 2008. Financial-market ebullience is stronger and broader than during the dot-com boom at the turn of the century. And economic output will shortly surpass historic highs.


The Fed might be right. The surge in prices and wages might be transitory. The widespread anecdotes of worker shortages and significant wage increases might not constitute a sustainable trend. Inflation expectations might be stable. Count me skeptical of the Fedís convictions. The risks the Fed is taking with its winsome forecast are significant, and the consequences of policy error are severe.


The Fedís new doctrine is a catalyst for heightened concern...


more,† with subscription