Back in late December of 2021, when Fed members themselves were thinking yeah we'll probably do about three quarter-point rate hikes next year, Berkeley professor Jon Steinsson tweeted the following:
"What should the Fed do next year? My opinion: They should raise rates by 25bp at each meeting (for a total of 200bp). They should pause if the FFR rises above the inflation rate or the economy stalls. They should do more if inflation keeps rising." (Emphasis mine.)
Steinsson's opinion seemed ludicrously hawkish at the time compared with the rest of the mainstream and Wall Street economists. So it's quite hilarious to go back now--after the Fed wound up doing twice as much as that last year--and read the comments below his tweet.
"A 200bp rate rise in one year means markets meltdown, a severe recession, and govt deficits skyrocket. No sane FOMC would do that," said one. "Good thing you are only an academic. Whatever really happens, you still get paid," sassed another. "Is this a parody account?" asked a third. A fourth simply wrote, "LMFAO."
But what's even more interesting are the people genuinely asking, "What are you seeing that makes you feel so certain of the urgency?" Plenty of the commenters still felt certain this was only a supply-chain issue and that rate hikes wouldn't solve it. The Fed, in fact, at that time was still stimulating the economy through quantitative easing!
Steinsson wasn't the only one who saw what was coming, though. Michael Darda at MKM Partners did too. The same week of Steinsson's tweet, in a client note, he warned, "Nominal demand and inflation are running well above trend, yet the Fed's policy stance is still more suited toward a crisis setting...Even if the Fed hikes rates four times next year, it will be behind the curve."
By the time the CPI hit 9.1% last June, obviously, and the labor market was still growing strongly, the Fed had egg on its face and was scrambling to normalize policy, just as Steinsson and Darda foresaw.
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's coming around to the same viewpoint.) And interestingly, some of the concerns the commenters raised on Steinsson's original tweet--about the impact such massive Fed rate hikes would have--are yet to be fully answered.
"Markets meltdown"? We got $12 trillion of wealth in equity and crypto wiped out, and have no idea yet of the full impact of that. "Severe recession"? We don't know yet--monetary policy often acts with a year or two lag, meaning the sharpest of the hikes last year haven't even fully set in yet. "Deficits skyrocket"? Inflation has helped close the deficit for now, but the future trajectory looks worse with higher debt service and entitlement costs.
If 2022 was the Great Fed Catch-Up, 2023 is the year we'll start to find out what the economic fallout from that will be.
See you at 1 p.m!
Kelly