After calling rising inflation "transitory" for most of last year, the Federal Reserve is finally taking it seriously. With the Consumer Price Index surging at a four-decade high, the Fed has now signaled an end to its easy money policy. A review of the minutes from the Fed's December meeting shows a faster tapering down of its bond-buying stimulus program during the first part of 2022, with at least three quarter-point interest rate hikes to come before the end of the year.
Fed policy makers may finally be admitting that inflation is a legitimate concern going forward, but that is still not enough for some economists. Peter Morici, business and economics professor at the University of Maryland, is calling for much faster and more aggressive action. "Inflation is really heating up, it's becoming embedded in the behavior of businesses and the expectations of consumers," he tells KTRH. "And I think we need to move quickly."
"(Former Reagan-era Federal Reserve Chair) Paul Volcker taught us that radical action is needed to deal with inflation this high," continues Morici. "Gradually raising rates doesn't do a whole lot of good."
Morici believe the Fed's current tapering-followed-by-rate-hikes plan is too little, too late. "I would suggest they raise rates immediately, and do it at each meeting---perhaps even more than a quarter of a percent," he says. "And they should not only end tapering and bond-buying, but start to sell off the balance sheet and remove liquidity in the system."
Of course, drastic actions like those would likely spook the stock market. But Morici believes that is a short-term price worth paying. "Look, in order to get through this they're going to have to go through a period where stocks may go through some sort of malaise, but if they get inflation under control, stocks will rebound," he says. "So my feeling is there's no real risk to equity investments in the long-term."