Steering Into A Storm

I’m pretty confident all the members of the FOMC own a boat. Powell on the Potomac, Mary Daly sails San Francisco Bay, and Kashkari lives it up on the shores of Lake Minnetonka. However, I am almost certain none of them know how to properly drive their vessels by the way they have been handling monetary policy.

When steering a boat, it is a lot different then your usual terrestrial vehicle. The main difference you learn is that a boat doesn’t stop, start, or turn on a dime. It takes much longer for your commands to start taking effect. A good captain therefor knows to plan two steps ahead at all times. Turn coming up? Start making a wide birth sooner than you think. Coming into the dock? Throw it in reverse well before you get to your final position and let the boat gently coast in.

To use the analogy of a boat when describing monetary policy, a boat doesn’t do it justice. The Fed more likely is driving a cargo ship or aircraft carrier, something that cannot make it through the Panama Canal. The Fed has a balance sheet of over $4 trillion and has a blank check when it comes to what they can do. So saying their monetary policy makes waves, is saying it lightly.

Now imagine your J.Powell. Captain of the world’s largest ship. At first seas are calm and times are good. There’s no inflation and the economy is growing. Now out of nowhere a storm develops on the horizon (COVID). Capt. Powell takes a hard turn to port (right?) and almost capsized the boat as a result. But the boat keeps chugging along.

Now, after the last drastic action, the ship is heading for the rocks (inflation). Everyone is saying “Capt. Powell, rocks on the horizon! You must react!” (and raise rates). Capt. Powell insists, “nonsense! Those rocks are transitory” And the ship keeps chugging forward.

You can see how the story plays out. As the rocks gets closer Capt. Powell realizes his mistake. “Full to starboard!” he announces. The ship lists with the turn and a scraping screech is heard throughout the ship. Powell made the turn but not unscathed. Rocks (inflation) significantly damaged the ship.

While the ship and our economy is still amongst the rocks, we are not through inflation by any means, yet most can see the economic storm on the horizon. Once again, Powell and the Fed are ignoring these warnings and are continuing their path.

Now our ship, the economy, can steer away from the hurricane of economic pain on the horizon. But every meeting with more rate hikes turns us closer to the center of the storm, and more economic damage. And as we know with our enormous ship, once we we get too close, it is too late to be able to steer away from the storm.

It would be prudent at this time to slow our turn away from our inflation rocks. Yes, we are still amongst the rocks. We are not out of the woods of inflation by any means. But steering into an economic downturn could be worse. It would be more prudent for the Fed to slow their rate hikes to see how the economy deals with rates at current levels. It may well be that we are a level of interest rates needed to stifle inflation. However after 3 months of these rates, it is still too early to tell. Higher rates will stifle the economy more, true. But the stifling may lead to suffocation and irreversible damage.