Kudlow: Jay Powell is talking the talk, but he's not walking the walk

After speaking yesterday to a group of Washington business economists, Fed Chair Jay Powell had a revealing back-and-forth with reporters. I want to explore this. Inflation is the number one problem in the country. 

A recent Wall Street Journal poll asked respondents, "What's the most important issue?" Inflation was at the head of the list. Twice as many people cited it as the second-highest issue, which was the war in Ukraine. Ten times as many people cited inflation over the coronavirus pandemic. 

In that same Wall Street Journal poll, 63 percent disapproved of Joe Biden's handling of inflation — just 34 percent approved. 

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A little later in the show we're going to talk to Sen. Rand Paul about the causes of inflation and what to do about it, but I think we're headed for some rough going over this inflation problem. 

Interestingly, Jay Powell said yesterday, and I quote, "I believe these policy actions and those to come will help bring inflation down near 2 percent over the next three years." Hat tip to my friend Byron York for picking this up. Three years. 

I'm going to say, in all likelihood, it's going to be three years of stagflation, and unfortunately the probability of recession during that period is quite high. The idea of a soft landing is a triumph of hope over experience. The Fed hasn't even begun to fight. Talk, yes. Action, no, not yet.  

Right now, in the first quarter of this year, I would say real GDP will rise by around 2 percent and official inflation in the GDP accounts will be 6 percent or 7 percent. When prices are rising faster than output, that's called stagflation. 

Wages are rising nicely, but inflation is rising faster, so working folks lose ground. The inflation we're experiencing was grounded in excessive government spending, deficit financed, and accommodated by Fed money printing. 

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Jay Powell continued to ignore all the warning signs over the past year and the whole argument from Joe Biden that Putin has caused inflation is utter nonsense. The oil price impact and the gasoline price effect jumped in the last maybe five or six weeks, but Biden has amnesia about the prior year when consumer inflation jumped from less than 2 percent to over 7 percent. 

Gasoline prices and the prices of virtually everything else have increased significantly — food, housing, cars, recreation, commodities, services, you name it — has gone up. 

You could take energy out of the CPI and the inflation would still be 6.5 percent over the past year. That would still be a four-decade high. 

So, while Mr. Biden has waged war against the fossil fuel industry, and lower production has caused energy prices to skyrocket, that's only part of the story. Deficit finance and easy money are the bulk of it. 

Noteworthy, Jay Powell said he wanted to be like Paul Volcker in his presser yesterday. Sorry, Jay, you're really more like Arthur Burn in the '70s who pumped up the money supply and destroyed the dollar. 

Way back when, I was an assistant to Paul Volcker when he was president of the New York Fed in the early '70s — just saying. When Volcker took over as Fed chair, he started shrinking the Fed's portfolio, balance sheet, hauling in the money supply, bringing down surging commodities and rescuing the value of the dollar. Real interest rates literally skyrocketed. 

If Jay Powell wants to be like Volcker, he should read up on what Volcker did in the early 1980s while Ronald Reagan was president. 

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Basically, Volcker believed in a strong king dollar and a commodity price rule. He kept slowing down money supply until the dollar fully recovered and commodities flattened out. 

Jay Powell has ignored the money supply, and the Fed's balance sheet expansion that creates money and never talks about commodity indexes. 

Powell says the Fed may be more aggressive, but they haven't even stopped buying bonds. They're still buying mortgage-backed bonds even while home prices are rising 20 percent. That's an outrage. Even if the Fed gets to 2 percent in its target rate by the end of this year, that would still be 4 or 5 percentage points below the inflation rate. They need to get their target rate 4 or 5 percentage points above the inflation rate.

Smart Fed people like Jim Bullard of the St. Louis bank and Chris Waller on the board, want a little shock and awe to reverse inflation expectations with 50 or 100 basis point rate hikes. That would signal regime change.  

Right now, Jay Powell is talking the talk, but he's not walking the walk. Inflation fears are jumping up everywhere, including the bond market, where the 10-year is now marching toward 2.5 percent, but it will go much higher.  

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The five-year Treasury inflation protection CPI breakeven has jumped up to over 3.6 percent, and commodities keep surging higher. In his back-and-forth with reporters yesterday, Jay Powell acknowledged the numerous mistakes the central bank has made over the past year, but he has not yet laid out a clear plan to reverse those mistakes and the longer he waits, the worse it's going to be for the American economy and its blue-collar working folks.  

Where's Reagan and Volcker when we need them?