A Turn Signal for the Fed’s Off-ramp on the Road to Rate Hikes

Perma-hawk Kansas City Fed President George gave a speech today calling for Fed balance sheet run-off as a substitute for rate-hikes. We predicted the Fed would take this view as a means of catering to the present intense and politicized concern with inflation, while doing no economic harm. Last week’s FOMC published a special statement drawing attention to balance sheet run-off, and now the most inflation-phobic Fed spokesperson has endorsed it. As a “do something” about inflation, balance sheet run-off is a harmless placebo to administer while the disease resolves itself. It spares us from administering what amounts to economic chemotherapy that is more dangerous than the disease.