Fed Groupthink Is A Bureaucratic Disease

Authored by Larry Kudlow via RealClearPolitics.com,

The super big story is the Israel-Iran war, as we await President Trump’s decision on additional American assistance to Israel.

There’s another war, though.

As Breitbart’s John Carney put it, the Federal Reserve has gone to war against tariffs.

Unlike the Middle East, this is a phony war.

The Fed stubbornly refuses to lower its target rate, because it has decided that Mr. Trump’s tariffs will increase inflation.

So I ask, what exactly is your model of tariff inflation? Because so far, with a 10 percent baseline tariff in recent months, inflation rates have come down, not gone up.

Since January, the Consumer Price Index has eased down to only 1.4 percent annually, below the Fed’s 2 percent target.

So tariff inflation has been missing in action. Yet the Fed chairman, Jay Powell, does not refer to this.

Mr. Powell himself is not an economist. He’s essentially a bureaucrat being driven by several hundred economists on the Federal Reserve Board staff.

Again, though, we don’t know what their model is.

The whole Fed right now is guilty of groupthink.

And Mr. Trump has homed in on that problem by saying that the Fed board is complicit with the mistakes of Mr. Powell.

Groupthink is a bureaucratic disease.

All these Fed announcements have 12 to nothing votes.

So where are the Trump appointees? Where is the new vice chairwoman for supervision, Michelle Bowman? Where is the former Notre Dame economics professor, Christopher Waller?

Where is some diversity of thought and why aren’t these board members questioning Mr. Powell’s slippery and uninformed anecdotes of his new tariff war on inflation?

Fed policy is completely opaque and non-transparent.

We have no idea how they arrive at their conclusions.

So, here’s a thought: During Mr. Trump’s first term, he put on a number of tariffs. During the China trade talks, he implemented  a 25 percent tariff on China.  

Additionally, he put 25 percent tariffs on steel and aluminum, 30 percent tariffs on solar panels, and 20 percent on washing machines.

And yet the inflation rate during those years was basically 2 percent or even less. You can’t generate an economic model based simply on one variable.

The Trump tax cuts in the first term increased incentives on business investment and production, creating more goods on the supply-side, more productivity as well, and all of that helped keep inflation down while the economy was growing.

In fact, five-year productivity for nonfinancial companies is increasing at a 2.6 percent rate — which is spawning growth without inflation.

The Republican Congress is about to pass a tax cut bill that will include permanent immediate cash expensing for machinery, equipment, and factories.

That kind of long-lived capital deepening will spur much more growth without any inflation, according to a recent academic study published by the National Bureau of Economic Research.

Now, I ask, has the Fed included that in its economic models?

We don’t know. It’s not saying.

It’s just clinging to this idea that Trump tariffs, which are actually aimed at lowering trade barriers and leveling the trade playing field, and opening up market access for American companies — all of which could actually reduce inflationary pressures by spurring even more supply-side growth.

And of course, Mr. Trump’s ambitious deregulation policy, another counter-inflationary move.

Yet Mr. Powell never talks about any of these tax and regulatory reforms.

Instead at his press conference this week, he blathered on saying “increases in tariffs this year are likely to push up prices and weigh on economic activity” and then he adds that “everyone I know is forecasting a meaningful increase on prices from tariffs because someone has to pay.” Huh?

I know a bunch of people who think exporters will pay.

I know other people who think our companies will pay.

In fact I know a whole bunch of people who don’t think tariffs can be inflationary because the money supply has dropped to only 4 percent growth from 30 percent.

Or even if a consumer has to pay more for one item, they’ll pay less for another item, leaving the price index flat.

So, I go back to Mr. Powell and the whole Fed groupthink. Somebody should tell him that he’s in charge of monetary policy, not trade policy. He has no idea about future trade deals or for that matter tariff rates. 

And somebody should tell him to please explain to the American public what the heck he’s doing to their mortgage rates and their credit cards and their car loans.