The Fed wants to hike rates next week because inflation might happen. Not because it's happening. Because it might. Energy prices could surge. Or they could not. But the potential cost of maybe getting surprised outweighs the cost of definitely making everything more expensive right now.
This is called preemptive monetary policy. You shoot first and ask questions later. Except instead of shooting a threat, you're shooting the economy in the foot because you had a bad dream about oil.
The article argues the Fed cannot know the exact path of inflation. True. They also cannot know the exact path of literally anything else. Employment. Growth. Whether Jerome Powell will wear a blue tie or a red tie. But we're supposed to trust them to price in a hypothetical energy shock that may or may not materialize because some guy wrote an op-ed about it.
Here's what actually happens when the Fed hikes rates preemptively. Mortgage applications drop. Business loans get more expensive. Consumer spending slows. Retail traders who just discovered options lose another three percent on their portfolios and blame Joe Biden. The economy cools. Everyone calls it responsible central banking.
Then energy prices don't surge. Or they do surge but for reasons completely unrelated to monetary policy. Or they surge and the rate hike did absolutely nothing to stop it because the Fed controls interest rates, not OPEC.
But at least we hiked rates. At least we did something. At least we looked serious while we guessed wrong.
The modest preemptive hike is the financial equivalent of swinging at a pitch before the pitcher throws it. You might look smart if you're right. But you definitely look like an idiot either way.
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