The systemic meltdown risk had passed. The fire was still smoldering but at that point, it was mainly a fiscal fire.
Fire Chief Jerome Powell himself said so, repeatedly begging Congress to deal with unemployment and business failures more effectively. He admitted there was little else his fire trucks could do but he kept them there anyway in the form of massive quantitative easing and keeping rates at the zero bound.
They are still on-scene now.
It is my opinion that this has the potential to go down as the greatest policy error in central bank history. I know that’s saying a lot.
Here’s a handy timeline summarizing the Fed’s near-daily actions in March and April 2020.
Consumer Price Index is a terrible proxy for consumer prices.
One argument, to which I am somewhat sympathetic, is that this doesn’t matter because the Fed can’t generate inflation even if it wants to. It’s been trying and failing for over a decade.
Stock prices and home prices both respond to liquidity, and the Fed is stuffing the economy with as much liquidity as it can. Recent activity far outstrips what they did in the Great Financial Crisis and following, which was itself unprecedented at the time.
I would like to go back to a time when we didn’t wake up in the morning wondering what the Federal Reserve would do. Its actions have distorted the economy, repressed savers, and made the wealth and income divide far greater than it should be.
John Mauldin 23 July 2021
Housing prices have no direct influence on our inflation measures. They do have indirect influence via the imputed, subjective “owner’s equivalent rent” methodology. Its accuracy is questionable at best.
What’s not questionable, though, is that home prices have a direct impact on the homeowner’s spending power.
If the ECB has the policy tools to return inflation to its objective, why does it not deploy them?