Kudlow: This is the key to economic recovery

Kudlow says Powell's press conference tried to white-wash the inflation picture

After yesterday's stock market holiday, with the Dow up over 900 points, today's market plunge of 1,200 points really was a dose of reality.  

Why do I say that? Because Jay Powell's press conference yesterday, coming after the release of the Fed's policy statement, tried to white-wash the whole inflation picture. 

He backed off aggressive rate hikes and he backed off aggressive bond sales from the Fed's portfolio to curb the money supply. He basically sounded like Joe Biden, blaming inflation on Vladimir Putin and COVID, rather than excessive federal spending, borrowing, deficit finance and money printing. 


Jerome Powell, chairman of the U.S. Federal Reserve, wears a protective mask during a House Select Subcommittee on the Coronavirus Crisis hearing in Washington, D.C., U.S., on Wednesday, Sept. 23, 2020. ( Stefani Reynolds/Bloomberg via Getty Images  / Getty Images)

As I said last evening, Powell was the non-Volcker. The Fed institutionally will never admit its mistakes and Jay Powell did some fibbing yesterday in his news conference because when he wasn't sugar-coating the soft landing or blaming Putin for inflation, he never mentioned the wage-price spiral that has become embedded in the U.S. economy. 

That's why he should appear before the new Disinformation Governance Board, along with President Biden's attack on the Trump tax cuts and assertions that $5 trillion more in BBB spending will curb inflation.  In fact, I have a long list of people who should appear before the new truth board, but that's for another riff. 

So, today was a dose of reality, because at 8:30 this morning the Bureau of Labor Statistics released its productivity and wage costs report for the first quarter. It was a bad report. 

It showed that labor costs have increased 7.2% over the past year and the inflation rate for businesses increased 7% over the past year. 

These are cold-hard facts: that wage increases, the likes of which we haven't seen for four decades, are now embedded inside the economy along with price increases that we haven't seen in four decades and this comes a day after the Fed's big meeting and news conference where none of this was mentioned. 

So, stock markets reversed and began to more properly worry that we have a very high and sticky inflation problem that is not magically going away overnight. As suggested by the Fed and central bank, efforts to curb the wage-price spiral are going to be longer, more aggressive and more economically painful than the government is telling us. 


Along similar lines, bond rates jumped up today. The benchmark 10-year Treasury increased 13 basis points to 3.05%, breaking the 3% barrier, also an acknowledgment that inflation is going to stay longer and be stickier than the Fed geniuses are letting on. 

Now, here's a key point. Hang in there with me, folks. When bond rates go up — now take a deep breath — the present discounted value of future profits goes down. Whew! Got it? 

In other words, rising bond rates bring down price-earnings multiples, which have been shrinking for several months. Profits are the mother's milk of stocks and actually they continue to rise. That is good and the consensus for tomorrow's job number is 380,000, which would be slower than the average 562,000 monthly gains over the past 3 months, but still a decent number. 

We're not in a recession yet, but it will be virtually impossible to avoid it and, frankly, inflationary recession is the worst of all worlds. 

History shows that high inflation ultimately leads to recession, shrinking profits, higher interest rates and falling share prices. It's not good. 

I'll repeat my view that the Fed has got to be far more aggressive, raise its target rate above the inflation rate and start selling bonds in order to shrink the excess cash they've injected into the economy. 


Also, my view is that the faster they move, the milder and shorter the potential recession will be, but the longer they wait and stall tough Volcker-like actions, then the worse inflation is going to be. Interest rates will be higher, profits will sink lower, stocks will get hurt more and the recession will be far deeper. 

The key for the Fed is to get back to price stability. That is the key to economic recovery. Today's 8% inflation needs to get back to 2% or less, but it's going to be difficult and if Jay Powell says otherwise, he will have to face the misinformation truth board again. 

Blaming Putin and COVID and the woman on the moon is not going to work. Being honest with investors and working folks is a much better approach. 

Now, final point, it's not all on the Fed. I know it's too much to ask, but it really would be a good idea if Congress would freeze domestic spending. 

 Another good idea: make the Trump tax cuts permanent.  

A third good idea: roll back the jihad against fossil fuels and deregulate the recent NEPA regulations that are preventing oil and gas production, pipelining, LNG exporting and even infrastructure — highways, bridges, roads, and tunnels. 


So, think of this, folks. If we had sound money, lower taxes and deregulation, we would make this a truly growthier economy. 

Save America. The cavalry is coming. I hope they know what to do. 

This article is adapted from Larry Kudlow's opening commentary on the May 5, 2022, edition of "Kudlow."