The Fed, the Treasury and a Fistful of Dollars

Early on in my career I worked at the International Monetary Fund (IMF), where I cut my teeth on a wide range of emerging markets. At the time, the running joke among the fund’s economists was that “IMF” really stood for “It’s Mostly Fiscal,” because policy recommendations centered on the role of fiscal policy. The idea was that a prudent, sustainable fiscal stance underpins macroeconomic stability, whereas a persistently loose fiscal policy makes life a lot more difficult, especially for the central bank. The Federal Reserve (Fed) seems to be finding out how true that still is.

The Fed’s governors walked into the May policy meeting with three months of unpleasantly high inflation readings in their briefing material. At the previous meeting, Fed Chair Jerome Powell still held out hopes that the January and February numbers might be outliers; this time he conceded that it is hard to ignore a full quarter of persistent inflation pressures. To get a sense of just how robust inflation pressures remain, take a look at the following table:


Comparing the three-month annualized moving average to the six- and 12-month figures highlights a marked acceleration across all US inflation measures. Supercore Consumer Price Index (CPI, core services excluding housing) running at over 8% in the past three months is especially striking, but headline and core measures of both CPI and personal consumption expenditures (PCE) are hardly reassuring, powering ahead at an annualized average of 4.5%. Asked about stagflation fears, Powell quipped that he could see neither the “stag” nor the “flation.” The numbers above suggest instead that you don’t have to squint too hard to see some good old ‘flation.