Back in late December 2021, when Fed members themselves were thinking, yes, we’ll probably hike rates by about three quarters next year, Berkeley professor Jon Steinsson tweeted the following:
“What should the Fed do next year? My Opinion: It should raise rates by 25bps at each meeting (for a total of 200 bp). You should pause if the FFR rises above the inflation rate or the economy falters. They should do more if inflation keeps rising.(emphasis mine.)
Steinsson’s opinion at the time seemed ridiculously hawkish compared to other mainstream and Wall Street economists. So it’s pretty funny to go back now – after the Fed did twice as much last year – and read the comments below his tweet.
“A rate hike of 200 basis points in a year means a market collapse, a severe recession and a soaring government deficit. No sane FOMC would do such a thing,” one said. “It’s a good thing you’re just an academic. Whatever really happens, you still get paid,” ranted another. “Is this a parody account?” asked a third. A fourth simply wrote “LMFAO”.
But what’s even more interesting are the people who are really asking, “What do you see that makes you feel so sure of the urgency?” Many of the commenters were still certain that this was just a supply chain issue and that rate hikes were would not solve. In fact, the Fed was still stimulating the economy through quantitative easing back then!
However, Steinsson wasn’t the only one who saw what was coming. Michael Darda from MKM Partners too. In the same week as Steinsson’s tweet, he warned in a note to clients: “Nominal demand and inflation are well above trend, but the Fed’s policy stance is still better suited to a crisis situation…Even if the Fed hikes rates four times next year, it will.” to be behind the curve.”
When the CPI appeared to hit 9.1% last June and the labor market was still growing strongly, the Fed was fed up and scrambled to normalize monetary policy, just as Steinsson and Darda had foreseen.
Here’s the twist: Now Darda thinks the Fed is tightening too much. (We’re trying to get Steinsson on the show so I can ask him if he agrees.) And interestingly, some of the concerns that commenters expressed on Steinsson’s original tweet — about the impact such massive Fed rate hikes would have — have not yet been fully answered.
“Merging markets”? We’ve wiped out $12 trillion of wealth in equities and crypto, and we still have no idea of the full impact of that. “Severe recession”? We don’t know yet – monetary policy often acts with a year or two lag, meaning that the sharpest rate hikes of the past year have not even fully kicked in. “Deficits are skyrocketing”? Inflation has helped close the deficit for the time being, but future prospects look worse due to higher debt service and claims costs.
If 2022 was the Fed’s big catch-up, 2023 is the year we will begin to explore what the economic impact will be.
See you at 1 p.m.!
Kelly
Twitter: @KellyCNBC
Instagram: @realkellyevans
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