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Economic Nonsense is Extremely Well Anchored in Fantasyland, and Not Just at the Fed

Today, Fed Chair Jerome Powell addressed the House Financial Services Committee. Let's look at his speech point by point.
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Powell Says Factors Driving Inflation Should Be Temporary

Yesterday in Mercy Me! Inflation Expectations Are No Longer Well Anchored (posted this morning before Powell's speech) I made this mocking statement" "The only thing that's clearly well anchored is Fed groupthink silliness."

I was certain we would hear the term "Well Anchored" again, and Powell did not disappoint.

Semiannual Monetary Policy Report to the Congress

Today, before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., Chair Jerome H. Powell gave his Semiannual Monetary Policy Report to the Congress

Powell: Conditions in the labor market have continued to improve, but there is still a long way to go. Labor demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones. Indeed, employers added 1.7 million workers from April through June. However, the unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. 
Mish: Not long ago, economists thought that 5% unemployment was about as low as it could get without boosting inflation. 5.9% was not at all considered "elevated". Now the goal, if indeed there is one, appears to be 3.4%, where it was prior to the pandemic. But this discussion presumes one believes the unemployment rate. I don't and neither does Powell and on that basis he is essentially correct.

PowellInflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation. In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.
Mish: Again, this is mostly accurate but it also ignores clear bubbles which Powell did not mention at all. The word "bubble" does not appear in his speech, on purpose. 

Powell: To avoid sustained periods of unusually low or high inflation, the Federal Open Market Committee's (FOMC) monetary policy framework seeks longer-term inflation expectations that are well anchored at 2 percent, the Committee's longer-run inflation objective. Measures of longer-term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC's longer-run inflation goal. 
Mish: This is where I have numerous, severe issues. 

Lies and Silliness

Inflation Expectations vs Year-Over-Year Inflation Measures 2021-06

For starters, and as noted above Inflation Expectations Are No Longer Well Anchored.

Inflation expectations hit the 5% level by averages and by single-point predictions, at 4.8% and 5.48% respectively.

The median 3-year average was 3.55% and 4.75% respectively. 

It is an outright lie to suggest this is "broadly consistent with the FOMC's longer-run inflation goal."

Why 2% in the First Place?

The Fed has never justified 2%. It is a number dreamt up, without explanation but unfortunately now used world-wide.

2% inflation benefits banks, the wealthy, and those with first access to money. 

Tax on the Poor

Inflation is best thought of as a tax on the poor and anyone who does not hold assets.

Real Hourly Wages Have Declined 11 Out of the Last 14 Months

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Real Average Hourly Earnings Percent Change 2021-06

Note that Real Hourly Wages Have Declined 11 Out of the Last 14 Months

If you held assets you are ahead. If you don't you are falling further and further behind.

And the Fed wants more of this to make up for its claim that "past inflation was too low". 

Yes, the Fed actually believes inflation was too low. It measures this by the PCE and CPI, neither of which factors in housing prices.

Case Shiller Home Price Index  

Case Shiller Home Price Index National and Top 10 by City 2021-04

In the Fed's eyes, as well as the view of economically illiterate economists, home prices do not constitute inflation.

Instead they are classified as a capital expense. Lovely. Tell that to anyone buying a home. 

Hiding Behind the CPI

It's easy to hide behind the CPI which excludes prices. And the masses mostly agree.

I hear the battle cry "It's a capital expense" over and over. 

The Fed has everyone brainwashed into believing rising prices are not inflation. 

OK it's not "consumer price" inflation, but not inflation? That's quite the successful brainwashing job.

Well done Fed!

Meanwhile, bubbles blow, and blow, and blow, and allegedly none of that is inflation either. 


Add it all up and "Economic Nonsense is Extremely Well Anchored in Fantasyland," and not just at the Fed!