After speaking yesterday to a group of Washington business economists, the Federal Reserve chairman, Jay Powell, had a revealing back and forth with reporters. I want to explore this. Inflation is the no. 1 problem in the country. 

A recent Wall Street Journal poll asked, “What’s the most important issue?” Inflation was at the head of the list. Twice as many people cited it as the war in Ukraine. Ten times as many people cited inflation as the coronavirus pandemic.

In that same WSJ poll, 63 percent disapproved of President Biden’s handling of inflation. Just 34 percent approved.

I think we’re headed for some rough going over this inflation problem.

Interestingly, Mr. Powell said yesterday he believes policy actions “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 saying 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 the working class loses ground. The inflation we’re experiencing was grounded in excessive government spending, deficit financed, and accommodated by Fed money printing.

Mr. Powell continued to ignore all the warning signs over the past year.

And the whole argument from Mr. Biden that Vladimir 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 Mr. 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, 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 is the bulk of it.

It’s noteworthy that Mr. Powell said yesterday he wanted to be like Paul Volcker. Sorry, Jay, you’re really more like Arthur Burns, who pumped up the money supply and destroyed the dollar in the ’70s.

Way back when, I was an assistant to Paul Volcker when he was president of the New York Fed in the early ’70s. Just sayin’. 

When Volcker took over as Fed chairman, 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 Mr. Powell wants to be like Volcker, he should read up on what Volcker did in the early 1980s while Ronald Reagan was president. 

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

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

He says the Fed may be more aggressive but it hasn’t even stopped buying bonds. It’s 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 Mr. Powell is talking the talk but he’s not walking the walk. Inflation fears are jumping up everywhere. That includes the bond market, where the 10-year is now marching toward 2.5 percent but it will go much higher. 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, Mr. 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. The longer he waits, the worse it’s going to be for the American economy and its blue-collar workers. 

Where are Reagan and Volcker when we need them?

From Mr. Kudlow’s broadcast on Fox Business News.