This week in Bidenomics: The killjoy Fed

If Donald Trump were still president, he’d be shredding the Federal Reserve. President Biden, for his part, is keeping his mouth shut. But he can’t be happy about a gloomy Fed that refuses to celebrate the steady improvement in inflation.

On Dec. 13, markets rejoiced as the monthly inflation report showed a better-than-expected decline, from 7.7% annualized inflation in October to 7.1% in October. The details were broadly encouraging. The price of goods was stabilizing as Americans shifted spending back toward services, in a return to pre-COVID norms. Gasoline prices were down and likely to fall further. Used-car prices, which rose at a crazy 41% rate in January, finally started to fall.

Stocks rose on the inflation news, since it suggested the Fed might be able to ease up a bit sooner on its rapid monetary tightening. Since its first interest-rate hike in March, the Fed had raised rates by nearly 4 percentage points, one of the fastest tightening cycles in its history. The Fed had telegraphed another half-point hike on Dec. 14, which is what happened. So far, so good.

But the Fed’s public statement and chair Jerome Powell’s remarks following the hike suggest the Fed is the last group in town to find the inflation news encouraging. The Fed’s rate-hiking committee forecast higher rates for 2023 than they had just a few weeks earlier, and indicated they don’t think a new round of interest-rate cuts will begin until 2024. That’s a more hawkish stance than markets anticipated. “Restoring price stability will likely require maintaining a restrictive policy stance for some time," Powell said on Dec. 14.

Markets tanked for the rest of the week, with the S&P 500 (^GSPC) down more than 5% from the moment Powell began speaking on Dec. 14. The disappointment is becoming familiar. Since the summer, a gradually improving outlook for inflation has duped the market into hollow rallies that the Fed promptly chokes off with its next interest rate move. "This has to end soon," Mr. Market seems to think, before the Fed comes along and says, "Nope, this isn’t ending any time soon."