Carney on ‘Kudlow’: The Fed Has Been Fueling Inflation and May ‘Chicken Out’ from Fighting It

The Federal Reserve’s accommodative economic policies have been fueling inflation and now Fed officials may “chicken out” from raising interest rates higher at their next meeting, Breitbart Economics Editor John Carney said in an interview Friday on Larry Kudlow’s eponymously named Fox Business show.

The personal consumption expenditure (PCE) data released Friday makes clear that Fed officials prematurely decelerated their interest rate hikes at their last two meetings.

Asked by Kudlow if the Fed will eventually have to hike the fed fund rate to 6 percent to rein in inflation, Carney said they “definitely” will.

“If you look at what’s going on with the fed funds rate, everybody talks about it being high already at 4.5 to 4.75 percent. It’s negative if you look at where the PCE inflation is. So, we right now do have an accommodative monetary policy,” he explained. “The Fed has actually been talking about it as if it’s already in restrictive territory. We are not in restrictive territory. If you look at all of the January numbers — retail sales, consumer spending, jobs — that’s not a restrictive economy at all. This is an economy that is being fed more fuel by the Fed. ”

The Federal Reserve “needs to go higher” in hiking rates rather than continue to wind down their hikes, Carney argued. “I think they made a huge mistake in December when they moved down to 50 basis points and another mistake in January when they went down to 25.”

“There’s no way you can look at this and say this was a just an outlier number or don’t count it,” Carney explained. “Median, core, and headline [inflation are] all the same. This is the underlying inflation that is running at an annualized rate of 7.1 percent.”

“We’re in some kind of temporary inflationary boom here,” Kudlow observed.

As Carney noted in Friday’s Breitbart Business Digest, it is “not just one data point” showing this inflationary boom. Friday’s PCE data confirms the inflationary trend seen in the latest consumer price index (CPI) and producer price index (PPI) — all of which shows inflation rising faster and hotter across the economy, including in food and energy prices which weigh most heavily on the public’s perception of inflation because these costs hit people’s pocketbooks on a daily basis.

Carney wrote:

The most politically salient bits of inflation — energy and food — were hot in January. Food prices were up 0.4 percent in the PCE measure. While this is well below the sky-high levels of last year — when food inflation in the PCE index peaked at 1.4 percent in February — this is the second month in a row at 0.4. So, progress in bringing down inflation in food has stalled. It is also far above anything that could be considered historically normal.

[…]

Core PCE prices, which exclude food and energy, rose 0.6 percent compared with the previous month. The forecast was for 0.4 percent. The increase in the December core index was revised up from 0.3 percent to 0.4 percent. The message repeats: inflation is running faster and has been running faster than previously thought. 

[…]

Importantly, the median PCE inflation tracked by the Cleveland Fed came in right in line with overall inflation, at 0.6 percent. This is an indication that inflation is no longer a story about outliers but about the central tendency of prices. Median inflation is a good indicator of where inflation is going, and the January figure is not good news. At 0.6, this was the highest median inflation since last August.

“I think if [Federal Reserve officials] had this data, they would not have reduced to 25 basis points,” Carney told Kudlow. “That makes it very awkward for them at the next meeting to have to go up to 50. I’m afraid they’ll chickened out, won’t be able to do that because that’s admitting that the January-February meeting was wrong.”

“They shouldn’t have shaved the hair off their chest,” Kudlow quipped. “Powell was growing some nice hair. He was tough. His new hero was [Paul] Volcker. And then he kind of turned tail and went back to this wussy RINO type stuff. Now look where we are.”

“I think if the Fed saw the revisions, if they saw all of this back at their last meeting, they would never have moved back [the rate hikes],” he added. “And now they’ve actually cornered themselves because they’ve put themselves in an awkward position if they move up from the 25 [basis points]. Everybody thought it was 25 from here on out till they stop. Now they really should be moving up to 50 again, but I don’t know if they will.”