Fed Chairman Jerome Powell risks pausing too soon

Earlier this month, Federal Reserve policymakers again raised interest rates but indicated they are prepared to pause any further tightening. This hesitation likely sentences Americans to inflation well above the Fed’s 2% target.

In the space of 14 months, Chairman Jerome Powell has raised the bank overnight lending rate from near zero to just above 5%, but monetary policy can hardly be characterized as too restrictive.

The consumer price index and the CPI less the volatile food and energy sectors are still rising at about 5%, and the services less energy at 6.8%. The latter is particularly sensitive to rising wages.

The most recent Bureau of Labor Statistics reports indicate wage growth has not slowed and thanks to tanking private sector productivity, unit labor costs are rising at 6.3% a year.

Mr. Powell puts a great deal of weight on consumer and business expectations, and those remain firmly anchored — but where?

According to the Conference Board monthly survey, households expect prices to be 6.2% higher next year. Clearly, those have broken loose from the Fed target.

Businesses such as McDonald’s, Pepsi and General Motors keep raising prices — or in the case of carmakers, dealers are taking bigger markups — expecting rising wages will bear those in a tight labor market.

Kimberly-Clark, maker of Huggies, Kleenex and other common household brands, just raised prices by 10% two quarters in a row.

Airline seats are scarce, because carrier workers moved to more stable industries in the wake of the pandemic. That repeats in much of the services economy.

Much has been made of the decline in the job openings but 1.6 jobs are available for every person seeking work. Before the pandemic, the ratio was about 1.2 and during much of the 2010s, less than 1.

As Mr. Powell pulls in the reins, President Biden is putting the whip to the horses.

The president’s infrastructure and industrial polices and other initiatives have increased federal spending from $4.5 trillion in 2019, when the economy was at full employment, to $6.4 trillion this year.

That jump is nearly 9% of GDP and creates demand for more goods and services than the economy can supply.

As Mr. Powell cools housing sales and homebuilding, nonresidential construction for highway, solar farms and semiconductor plants booms along. While lumber, essential in new homes sees fading demand and prices, concrete, essential in commercial construction, endures global shortages.

The Fed suffers a terrible credibility problem.

The Fed was promiscuous during the pandemic and its wake to accommodate Mr. Biden’s spending. The president printed bonds to pay for the American Rescue Plan, Infrastructure Act, Inflation Reduction Act and so forth, and Mr. Powell manufactured greenbacks to buy many of those.

Now the bond market expects the Fed to cut interest rates in September to fend off a recession.

Gray clouds are gathering.

The stress that higher interest rates place on regional banks — especially in the wake of the failures of Silicon Valley Bank and Republic Bank — makes business loans tougher to obtain.

Consumers are piling on too much credit card debt and turning to buy-now-pay-later apps to purchase food, gasoline and other essentials.

Home foreclosures are rising. Office building landlords hit by the shift to work from home and flight from blue to red states are missing mortgage payments.

A deluge of car loans thousands of dollars underwater is threatening the price-increase-induced auto sector recovery.

Indeed, GDP advanced only 1.1% in the first quarter thanks to a slowdown in business investment. Consumer spending carried the economy to modest growth, but virtually all of that was stacked into January — consumer activity slowed the next two months.

All that should ultimately cause consumers and businesses to curb private demand and make space for Mr. Biden’s investments in public works, green energy and semiconductors. And let a modestly growing supply of workers and materials catch up with demand.

That makes Mr. Powell’s job tougher, too.

Speculators betting the Fed will cut interest rates in September suppresses rates for critical three-, five- and 10-year Treasuries. Those yields are only about 3.5% but provide the underpinnings for car loans, commercial and residential mortgage rates, and the like.

At the news conference after the recent Fed interest rate policymaking meeting, Mr. Powell said the institution remains steadfastly committed to staying the course to get inflation down to 2%, but he has repeatedly indicated he wants to accomplish a soft landing too.

Achieving both requires the navigational skills that put the James Webb Space Telescope in an L2 solar orbit — always in line with the sun and Earth.

Mr. Powell is not presiding over a band of astrophysicists, only error-prone economists. And consumers, businesses and the bond market are all betting Mr. Powell will accept considerably more annual inflation than 2% to save the economy from a recession.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.