Fed Will Remain Accommodative
The Federal Reserve Open Market Committee (FOMC) met today and its interest rate policy unchanged.
Key FOMC Points
- Federal Reserve will use its full range of tools to support the U.S. economy.
- The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement.
- Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.
- The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.
The above snips are from the FOMC Press Release.
Inflation jumped as predicted, and so was the Fed comment about transitory.
Reflections on Transitory
Optimistic Fed Signals “Strengthening” Economy, Shrugs Off Inflation As “Transitory” https://t.co/AdtcpBezb1
— zerohedge (@zerohedge) April 28, 2021
https://twitter.com/NorthmanTrader/status/1387468429221900293
QE infinity? #Fed officials strengthened their assessment of economy while leaving interest rates and the pace of asset purchases unchanged. Fed has noted that inflation has risen, though they in the same sentence highlight that this is largely transitory. https://t.co/MgEGGKRXXd pic.twitter.com/hJiqsPRbhg
— Holger Zschaepitz (@Schuldensuehner) April 28, 2021
“largely” transitory. So not entirely transitory, then?
— Ian Shepherdson (@IanShepherdson) April 28, 2021
POWELL: INFLATION IS TRANSITORY pic.twitter.com/AGSOQie8A8
— Rudy Havenstein, Senior Markets Commentator. (@RudyHavenstein) April 28, 2021
Transitory Flashback
I forget to add…
Don’t worry, it’s transitory, besides we ignore it anyway because it’s not a core item
— Mike “Mish” Shedlock (@MishGEA) March 24, 2021
Inflation is Poised to Soar, 3% by June is “Almost Certain”
Please consider my March 12, 2021 prediction from Inflation is Poised to Soar, 3% by June is “Almost Certain”
Expect the Word Transitory
If these spike projections are accurate, expect Powell and other members of the Fed to be howling the word transitory for weeks on end.
Transitory to What?
It’s all “transitory” but …
I am trying to figure out “to what?” https://t.co/6mWqF4JPJo
— Mike “Mish” Shedlock (@MishGEA) April 26, 2021
That comment was from yesterday.
What’s Ahead For Year-Over-Year Consumer Price Inflation?
An even bigger jump in measured inflation is on the way. For details, please see What’s Ahead For Year-Over-Year Consumer Price Inflation?
I strongly disagree with Powell’s assessment that inflation is low.
Indeed, accurately measured, and based on home prices, I believe inflation is well over 4%. I will have a better number once I crunch the latest Case-Shiller Home Price data.
For now, note that as of March 31, Home Prices Rise at Fastest Pace in 15 Years
Hello Fed, Inflation is Rampant and Obvious
Please recall Hello Fed, Inflation is Rampant and Obvious, Why Can’t You See It?
Also please note, Higher Prices at the Grocery Store as Ag Futures Surge the Most in 8 Years
Transitory or Not?
Curiously, I agree with the Fed that the spike is indeed transitory. I am not the only one, but there are very few of us.
On April 9, I commented Expect Inflation to Accelerate? Here’s 8 Reasons to Expect Decelerating Inflation
In that post I quoted Lacy Hunt at Hoisington Management as follows.
“Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.”
Transitory Jokes
It is easy to make jokes about “transitory” but the disinflationary forces are huge.
In addition to the 6 factors Lacy noted, I added two. Then in subsequent posts I added more reasons including tax hikes and demographics.
Historical Perspective on CPI Deflations: How Damaging are They?
Finally, please consider or reconsider Historical Perspective on CPI Deflations: How Damaging are They?
A BIS Study show routine price deflation is a benefit. Central banks have not caught on.
In their attempts to fight routine consumer price deflation, while ignoring home prices and obvious speculation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.
Nearly Everyone Looking the Wrong Way
Factor in poor demographics and guess where we are.
With nearly everyone looking for stronger inflation and higher bond yields please consider The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed
The Fed Says “Money Doesn’t Affect Inflation” Others Say “It’s the Money Stupid”
Damn the bubbles and full speed ahead with accommodative policies as the Fed actually says “Money Doesn’t Affect Inflation”.
The Fed sponsored more bubbles that will burst and bursting bubbles combined with poor demographics are hardly inflationary.
Yes, It’s transitory!
The above discussion pertains to CPI measures of inflation not monetary inflation which is 100% certain to continue.
That said, the demographic forces impacting prices coupled with Biden’s tax hikes (something will pass) are indeed price deflationary as would be declining asset valuations.
How to Play?
Please ponder The Odd Couple, US Treasuries and Gold, Good Time to Buy Both?
Mish
Everything is transitory and that would include inflation as well.
Play happy wheels game online – link to happywheels24.com
We can attribute these price increases to a shortage of human capital, not transitional inflation. link to youtube.com
Powell is 100% correct. Everything is transitory and that would include inflation as well. It may be around for the rest of our lives, but since our lives itself are transitory…
Transitory in the sense Powell is still looking at the underlying debt deflation dynamic and the US hasn’t broken free, so he has to safely navigate perceptions while devaluing. Can he avoid a treasury sell off ? Looking at the dollar vs other currencies so far holding together. Maybe the major treasury holders China, Japan etc have decided they can’t avoid this real terms loss and hence won’t react. The thing is he has to continue with the plan even if there -is- a major treasury sell off.
“From now on, the pound abroad is worth 14% or so less in terms of other currencies. That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” Wilson, Prime Minister UK 1967
This caused an immediate and massive take off of inflation continuing vertiginously up peaking at 24% in 1975, by which time the UK was the “sick man of Europe” as known at the time leading onto the election of Thatcher.
This is the real risk for the states. The next decade.
You buy a house for $100,000, 20% down, 3.75% interest, total 30 year cost $153,200. If the house price “inflates” 20% and you buy it for $120,000, but the interest rate is now 2.75%, then the total cost is $165,120. The total inflation is 7.8%, not 20%. Mortgage rates play a huge factor in the cost of housing.
That picture reminds me of the many years I spent in Colorado. Used to irk me to pay high prices for 85 octane when most of the country gets at least 87.
As for the Fed, I’ll believe them as soon as the printer stops going brrrrr.
It is 85 to match the level of oxygen in the air.
Yeah, found that out when I moved there but had barely seen it my whole life before that. I remember it took me several months to have the guts to put 85 in my own car, but after doing so I didn’t notice any appreciable difference.
Got excited about Mish’s pic because I haven’t seen one of those pumps in years.
Put 85 octane in your car? Just don’t that to a European car.
That’s what I’ve heard, but I had a Toyota then. I checked the manual and I think it said 83 and up was okay.
Japanese cars are made for export: different car for different region, hence those sold in the US have engines according to gasoline sold. European cars are made the same for all markets, and expect the owner to know better. 🙂
Japanese cars are made for export: different car for different regions, hence those sold in the US have engines according to gasoline sold. European cars are made the same for all markets and require high octane gas – and expect the owner to know better. 🙂
Drove to the top of Mt. Evans 25 years ago for a vehicle evaluation trip. Not much air up there at all and that engine huffed and puffed… a lot.
Mish, can you explain how can tax hikes be deflationary?
If you rob (tax) Peter an extra 1000 dollars to pay (give it) to Paul to spend the same amount of money is in the economy. It’s just allocated in different places, assuming Paul does something different than Peter would have. I see possible 4 outcomes as:
Am I missing something?
Good points. Except what if Peter is a Steve Jobs and Paul is Charles Manson. You think Jobs may find a more productive use of that 1000 than Charley. It might have a more positive impact to the economy.
Nonsensical. In reality, it would be more like Steve Jobs and John Q Public. And Steve Jobs is likely to use it for share buybacks, and John will use it to buy food.
Steve Jobs used to carry around a bunch of copies of Autobiography of Yogi, which he liked to gift randomly to people he met.. He was perhaps the most innovative person in my generation. Not your best example of a corporate greedhead.
John Q Public would probably buy 10 bags of cannabis gummy bears with his thousand.
“2 Things You Won’t Learn From the New Steve Jobs Film”
-use of slave labor and “innovative” tax avoidance schemes.
It is telling that this guy is such a shining example. Just shows how crappy the “really crappy” ones are.
You have to add in the friction of administrative overhead at each step.
What happens to investment? Take the extreme – tax everything at 100% and productive work stops. It depends on what you call deflation, but the value of credit on the books of banks plunges. Arguably “recessionary” is a better word.
Ah, the same old Laffer curve nonsense. Sure, it might be (axiomatically) true at 0% and 100%. But at all rates in between? It is not a curve. More like a bowl of spaghetti!
I think what you’re missing is we either conjure up that $1000 from thin air or we take it from someone. If we don’t raise taxes then the money comes from new printing. If we raise taxes, we steal it from someone else, this smaller inflation.
But maybe I’m missing something…
By end of 2022 we will all see how deep we are all in the crapper.
I haven’t been this negative for years.
If the Dems expect a good 2022 election outcome that are really deluded. Biden and team will rue the day they won 2020. It’s the best favour they could have done to the other side.
And if you’re wrong on this point…by the end of 2022, will you admit you don’t know anything and certainly can’t predict the future? It’s a long way away and who knows maybe you are right! But if you’re not, can you personally agree to stop spreading bull shit out of your ass?
I think they are wrong but what does it mean if they are right?
Explain please.
The term transitory, when used by the Fed, simply means that it might last until the current Chairman retires, but that the next Chairman can fix it in no time.