The market is cheering the Jerome Powell’s self congratulatory and market friendly speech at Jackson Hole. “Your mileage may vary,” said Powell. Indeed.
Reassessing the Effectiveness and Transmission of Monetary Policy
Powell’s speech was on “Reassessing the Effectiveness and Transmission of Monetary Policy”.
Self-Serving Fed Nonsense
Powell had praise for how the Fed reduced inflation without bringing too much misery to unemployment.
Instead of blaming monetary and fiscal policy for inflation, Powell blamed supply chains and energy.
Undoubtedly supply chains and energy played a part, but the Fed kept a massive QE policy cranking despite the world’s largest stimulus in three rounds. The last round was the biggest and unwarranted.
At the end of the speech Powell gave a silly rant on the big role inflation expectations play, and that inflation was lower because people believed the Fed was credible.
Speech Quote Highlights
- It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions.
- The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.
- We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market.
- The initial burst of inflation was concentrated rather than broad based, with extremely large price increases for goods in short supply, such as motor vehicles. My colleagues and I judged at the outset that these pandemic-related factors would not be persistent and, thus, that the sudden rise in inflation was likely to pass through fairly quickly without the need for a monetary policy response—in short, that the inflation would be transitory. Standard thinking has long been that, as long as inflation expectations remain well anchored, it can be appropriate for central banks to look through a temporary rise in inflation.
- For a time, the data were consistent with the transitory hypothesis.
- While researchers differ in their approaches and, to some extent, in their conclusions, a consensus seems to be emerging, which I see as attributing most of the rise in inflation to this collision. All told, the healing from pandemic distortions, our efforts to moderate aggregate demand, and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2 percent objective.
- Disinflation while preserving labor market strength is only possible with anchored inflation expectations, which reflect the public’s confidence that the central bank will bring about 2 percent inflation over time. That confidence has been built over decades and reinforced by our actions.
- That is my assessment of events. Your mileage may vary.
Market Friendly Accommodation
The Fed has clearly shifted to the jobs portion of its dial mandate letting inflation heal over time.
We already understood this to be the case from the Fed’s last FOMC meeting, but Powell emphasized that emphatically with his statement “We do not seek or welcome further cooling in labor market conditions.”
Inflation will take second position in the dual mandate. As long as people believe inflation will come in lower, it will. Yeah, right.
Your Mileage May Vary
Undoubtedly, “Your mileage may vary,” is the most accurate thing Powell said today.
Two Fed studies have debunked the myth of inflation expectations, and so does common sense. I have discussed this before but let’s go over it again.
Debate Over Inflation Expectations
I got into a debate with Bill Fleckenstein on Twitter over the silliness of it all. Curiously, he is a true believer.
Fleck dismissed the study without reading it.
Fleck: “The fed study? like they know anything. expectations impact behavior, it’s human nature, and it causes double ordering and ” buy in advance” at times.“
Me: “Bill, do you double up on rent? Food? Gasoline? Clothes? Natural Gas? Stoves, Refrigerators? What!”
Fleck : “First of all you cannot double up on rent”.
The irony of his comment is that it proves the point I was making.
Components of the CPI
By my calculation, at least 80 percent of the CPI is inelastic.
People will not double up on rent in advance if they think rent will go up. Similarly they will not double up on gasoline, medical operations, etc.
People can stock up on food, if they have a freezer, as I recommend. If so, they stock up on sales prices (i.e. the price has come down). People do not generally stock up at the highest prices expecting still higher prices. And where would they store it anyway? A freezer only holds so much.
Do people buy two cars if the price is going up? Take out extra prescriptions?
Everything Else
Please think about “Everything Else”.
That category includes refrigerators, TV,s, landscaping, vacations, etc., some of which are elastic demand items and some not. For example, you buy a refrigerator when you need one and then don’t ever double up no matter what your expectations.
Among elastic items, do people take two vacations this year and none the next if the cost will be higher next year?
So, expectation proponents, please tell me what the hell people will stock up on at high prices simply because they expect higher prices next year. Then tell me what percent of the CPI that is.
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
I mentioned a Fed study and Fleck dismissed it out of hand immediately without reading. It is very much worth a look.
Please consider Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.
The direct evidence for an expected inflation channel was never very strong. Most empirical tests concerned themselves with the proposition that there was no permanent Phillips curve tradeoff, in the sense that the coefficients on lagged inflation in an inflation equation summed to one.
Finally, even if one is willing to entertain the idea that in some vague, mushy sense concern over costs and demand by individual firms facing fixed prices leads to a dependence of aggregate inflation on expected inflation, we are still left with the conclusion that short-run expectations should be the ones that are most important.
One might also be uneasy about policymakers’ relying too heavily on the assumption that inflation’s long-run trend will remain stable going forward so long as measured long-run inflation expectations do. Even if every one of my preceding arguments is judged by the reader to be completely unconvincing, it nevertheless remains the case that we have nothing better than circumstantial evidence for a relationship between long-run expected inflation and inflation’s longrun trend, and no evidence at all about what might be required to keep that trend fixed (beyond that it might involve keeping actual inflation from moving up too much above two percent on a sustained basis).
[Mish note: The last two paragraphs are a direct criticism of Fed policy as practiced by every Fed chair and people dismiss these reports without reading. The next paragraph is a hoot as well.]
Or would you justify the view that expectations “matter” by pointing to the inflation experience of the 1960s and 1970s, even though that period provides no actual evidence that workers or firms tried to boost their wages or raise their prices in anticipation of future price or cost changes?
The Fed study was not only accurate, it was funny, and replete with humorous quotes.
Amusing Quotes
- Expectations are by definition a force that that you intuitively feel must be ever present and very important but which somehow you are never allowed to observe directly: R. M. Solow (1979)
- Pure economics has a remarkable way of pulling rabbits out of a hat. It is fascinating to try to discover how the rabbits got in; for those of us who do not believe in magic must be convinced that they got in somehow: J. R. Hicks (1946)
- Don’t interfere with fairy tales if you want to live happily ever after: F. M. Fisher (1984)
- Few things are harder to put up with than the annoyance of a good example: Mark Twain, The Tragedy of Pudd’nhead Wilson (1894)
Do Inflation Expectations Matter?
I have discussed inflation expectations at least six times over the years.
My latest was on December 1, 2023: How Do Inflation Expectations Impact Wages and Future Consumer Inflation?
Inflation expectations cannot possibly matter much because 80 percent of the CPI is fixed demand and at least half of the rest turns out that way in practice.
The irony is Fleckenstein attacked a Fed study that was critical of the Fed without reading it despite the fact Fleckenstein is very critical of the Fed.
And amusingly, Fleckenstein places great faith in an easily debunked Fed hypothesis.
The one big question is since a large percentage of the population never has much extra money how would they buy ahead to avoid future inflation. It is possible using credit, but one would need factor in the interest cost of money against the possible lower cost.
Interesting that there is precious little emphasis on the deficit exceeding $2 trillion for this fiscal year with over a month to go and the debt exceeding $35 trillion within the last few days. Government spending money it does not have is a root cause of inflation and lowering interest rates will incentivize congress to continue its irresponsible spending. I look for these projected rate cuts to be short lived as inflation is still with us, just a little lower for the near term. The long term issue is debt brings forward economic activity at the expense of future economic activity and thus demand for labor. While lowering interest rates may help in the short run, doing so exacerbates the long-term issue.
“Powell had praise for how the Fed reduced inflation without bringing too much misery to unemployment.”
“…Powell gave a silly rant on the big role inflation expectations play, and that inflation was lower because people believed the Fed was credible.”
Powell’s comments were then contradictory.
In Bostic’s CNBC interview at Jackson Hole this morning, he said all inflation indicators on his dashboard are still flashing red, just not bright red. So, let’s cut, “just because”? Or is it just because the FOMC was recently packed chock full of political appointees?
Perhaps they are cutting b/c they can see the emerging recession as easily as Mish can, although they cannot talk openly about it without causing panic, and so they want to immunize themselves against being blamed for it?
Well, given the current socially constructed political-economy conspiracies and conspirators in charge of money devaluation at the Fed, I suppose today’s non-binary Ferengi will be stocking up on stocks as well as more freezers for a multiyear supply of Rocky Road, as with insider trading Madam Nancy’s freezers and presumably her carpetbagging clan of Gavin and Kamala, etc..
RFK Jr and Nicole Shanahan joint Trump.
No one even bothers to *try* to think past the end of their nose anymore. A September rate cut evokes the Star Wars meme, “It’s a trap!” Round 2 of out of control inflation, here we come.
Speaking of thinking past the end of one’s nose – why do people believe short-term interest rates have any influence at all over inflation, in a policy regime where rates and credit supply have been decoupled?
It used to be that the Fed raised short rates by dumping bonds and constraining the actual availability of credit (“money supply”). I can see how taking credit out of the economy would bring down inflation eventually. But in recent years they have neutered rate hike effects by paying interest on reserves and leaving the credit supply as-is (except most recently for gradual QT, offset by huge fiscal deficits).
I don’t think they have much of a clue what their policies are actually doing. Or, they know exactly what they’re doing and the interest rate policy is just for show while the QE, QT and fiscal balance (which rarely get mentioned) are doing the actual work.
In either case I’m not confident that inflation stays down if there is overall easing.
I, for one, am extremely confident that the fed will continue to help devalue the U.S. Dollar by promoting and institutionalizing “inflation”. Of course now that it’s down about 98% from its pre-fed level the heavy lifting is already done.
They can try, but as long as people just refuse to *expect* inflation, we can thwart their efforts.
LOL!!!
P.S. please add the /Sarc for those who dont see it inmediately!
There’s nothing to stop them from taking another 98% off the dollar! It might happen faster too.
Eating lunch at Panera. The place is packed. Average cost per lunch is probably arpund $15. Again, none of this looks recessionary. Ive been.coming to this location for 12 years. It was much worse in 2011-2013.
Which is equivalent to losing your job and stating it’s a depression.
How much would that $15 purchase have been in 2012, $7.50? Not a sign of a healthy currency.
The Fed put on overextended lifestyles is working, in a tag team with massive government annual debt outlays, well beyond revenues.
The start of a recession feels just like a healthy economy, except some people (and not those who can afford eating at Panera) are cutting back.
McDonald’s, Lowe’s and many other retail stores are warning on mid- and lower-tier consumer weakness. Walmart is picking up as people trade down.
You may shocked to learn the Fed makes mistakes. Maybe the problem is expecting perfection from imperfect human beings.
Some view their decisions as perfectly wrong- but that’s still perfection!
I’d say the problem is that the Fed exists in the first place. The idea that a small group of “academics” knows better than 300+ million people what interest rates should be is absurd. There’s a reason why the bankers all traveled separately and under assumed names to Jekyll Island in the 1910s to conceive their creature and then had it passed in Congress in December 1913 when most of Congress was away for the holidays. Bastards.
Maybe the problem is having a Central Committee implementing Price Controls on the single most important price?
Everyone knows that price controls distort market behavior to everyone’s detriment. Why do we tolerate Price Gouging in finance but not retail?
“You may shocked to learn the Fed makes mistakes.”
You almost make it sound like it would come as a shock to learn that The Fed has never made anything other than mistakes. And is, itself, anything at all aside from a complete, no redeeming features, mistake to begin with.
Since Oct 2008 the Fed controlled the front end and the long duration. The Fed never expected that their stealthy raids will create a tsunami of money. Their boosters decayed fast. They will not be able to protect homeowners. Supply will exceed demand. Lower rates will exacerbate the decline.
Everyone keeps talking about the need for affordable housing. One way to get to this goal is for existing homeowners to suffer a 50% haircut.
The other way is to increase everyone’s income who makes say, less than $200k, by 100%.
The Fed will cut rates. Home prices will decline. Highly skilled workers will earn higher wages. The gov will fill its coffer. Gov debt and housing prices will decline. Gen Z and alpha will be able to buy houses. Even Nicole Shanahan cat can understand it.
Or you could double-up on the average occupancy of a residence at no extra monetary cost.
“Immigrants” do that all the time. SOmetimes they live 4-6 people in a 1-bedroom apartment!
Understood. Perhaps Boomer grandparents could cohabitate with their GenZ grandchildren in their 5-bedroom McMansions.
Imagine if a Harris administration started cracking down on houses bought for the sole purpose of laundering money. Suddenly housing would become availabe and affordable. There iis a bunch of housing no one is living in.
Kamala plans to add 3,000,000 housing units.
They made a lot of “plans” 4 years ago. They did not deliver.
The USA debt is $35 TRILLION. Interest to service that debt costs almost $1 TRILLION/year.
Powell and the government in general are looking for any justification (aka excuse) to lower interest rates in order to reduce the USA’s cost to service this debt.
Plain and simple.
Yep. Who doesnt like low rates on their loans ?
For every borrower there is a lender who wants the higher interest.
Are they sufficiently ahead of the lag effect?
Easy credit has flamed inflation for years now. The cure is tight credit. The ride would be painful but beneficial in the long term. The Fed thinks in timeframes that are absurd. The cure will take years- not months.
Neo-classical macro is delusional and ineffective of almost anything but pain. The perfect place to implement monetary policy is at retail sale where a 50% discount/rebate policy not only mathematically converts chronic erosive inflation into BENEFICIAL price and asset deflation. Its a true paradigmatic change in economics and the money system…in a single policy. Thank you non-Nobel Prize committee.
This is all rubbish. The pressure cooker was about to explode and now any rate cut will just fuel much higher inflation … any interest rate cut the Fed makes now is not gonna have any effect on the election …
Stocks exploding higher will definitely affect the election.
A return to double-digit annual appreciation on residential RE will definitely affect the election.
Not enough time left
People will go on buying essentials with or without Powell.
Are they now going to run right out and do something Big when they still have no buying power? That answer is no.
People are still tapped out and 25 basis or 50 basis cut is not going to change anything.
Underlying economic weakness will persist for next year.
Add: About that inflationary expectation aspect affecting behavior. I am witness to it where I live.
Soon to be married couple whom I know, who have spent there 20’s and early 30’s living and renting in NY NY have discovered as they approach their late 30’s that they can expect to never be anything more then Renters in NYC.
So they recently bought a House in western part of a county that is East of NYC.
For them they are downsizing their aspirations.
I suspect there are going to be many more people of that generation who will be downsizing their expectations as well.
Is housing inflation done and dusted? Maybe in the Big city where paying 1.4 to 1.7 million for a 1 bedroom 450 sq. ft unit is not feasible for most.
Will be putting a floor under demand for outlying areas.
Have a son lives in eastern Pa. tells me people are commuting from Pa. into NYC on a daily basis. Three hour plus commute gone out of their lives every day.
So if there is a trend developing it is one of thinking smaller and making bigger sacrifices just to stay where you are.
my takeaway from Jackson hole.
Guess what is important is that Powell thinks he and the Fed are doing a great job.
After all when he ended his speech everybody was clapping.
2nd add: If you are happy with what is going on then vote for the people who just completed their convention.
Lot of irrelevant people, making irrelevant statements, about irrelevant subjects.
3rd add: As am a deplorable and as consequence quite slow in mind, hopefully someone out there can set me straight.
We have a working population that is moving out of NYC as they can not afford to live there. They now must add in commuting time to their regular jobs so as to work and pay taxes and have a roof over their heads.
Their tax paid in are then used to provide a roof over the head for illegal migrants to live where those who work can not afford to.
Must make perfect sense to someone in Leadership or else why would this be allowed to continue? See I really am quite slow.
Thanks in advance to anyone who can explain this situation to me.
The Hamptons?
Uhm, no.
South Shore Western Suffolk as they need LIRR electric into city.
East end is nice in Winter when all city people go back to city.
Still some of Long Island left as it was.
After Labor day local Island stations play, “Come out come out wherever you are” from Wizard of Oz as sign all is clear.
Am sure that couple I mentioned will be voting Dem as usual, even though they now have 2 1/2 hour round trip added to the Day, plus ticket fare.
Just to clarify I live mid Suffolk, North Shore. Worked as far east as Montauk at times.
East end used to be great people who lived by their farm. Now it is quite different. Hard to talk with people from City. Nothing much in common.
Personally, I do double up on shoes and everything I can when they go on sale.
I bought like 8 pairs of 150.00 shoes not too long ago when they went on sale for 60.00. It was a great deal!
I think people do move forward with purchases now if they expect higher prices later, but it’s limited.
The truth is probably in between where Mish is and Bill.
And then your wife said, “you’re not going to wear those, are you?!?!’
8 pairs of shoes! I probably haven’t bought 8 pairs in 20 years.
I’m a woman and I don’t own 8 pairs of shoes.
Do you walk a lot?
I can’t remember when I last bought a pair of dress shoes. The only shoes I buy these days are sneaks at ROSS for between $30-$50.
The foam degrades over time, even without use. Three pairs might have been the better deal.
For all you haters out there, he may not have bought all 8 pairs for personal use.
I’ve bought extra shoes for whole family when on sale. But it was “on sale” driven, not inflation driven.
Yeah, “public service”.
It’s still around alright, but now days “public service” appears to mean “servicing the public”, and doing it in the same fashion as a bull services a cow or a sniper services a target.
Who is left to buy QQQ?
It is the level of money supply in the hands of investors along with interest rates that creates the bidding pressure that influences asset prices. And of course, earnings matter too.
I am not predicting the stock market is going up or down but trying to explain what is driving it.
Their assymetric response is disgusting. We don’t yet achieve their BS 2% goal but we let it effing burn hot for months and months and months. Funny, they didn’t use “transitory” when examining data on the labor market/unemployment rate. One whiff of it coming close to possibly thinking about the consideration it may be slowing…CUT! (oh, and to get tons of jawboning higher, talke about possibly cutting for nearly a full year) Inflation roars forever and goes white hot for nearly a year before responding, well, we think it’s transitory. Papa Dave can give us examples of where prices are lower but compared to 2019 most things I see are 70-200% or more higher. He laughed at the Diet Mt. Dew indicator so pick another: mayonnaise, bread, sugar, baked beans; homeowners insurance, car insurance, health insurance, houses/rent, new car, services like car repair, physician visit, tuition. Sure, there’s been easing but that easing would still reveal personal market baskets well north of the official CPI reading. When I go into the grocery store I ask myself, “how would this look if I were still young and raising kids? Omfg!!!” And those house prices, @((!)#@$, no chance if i had to buy now and a person doesn’t just sell, they have to live somewhere.
As long as the market is happy I guess. To think, by now, the market thought we’d have 4-6 rate cuts and yet we are at record highs and moving higher in advance of the FIRST cut in September…and to think the market also at all time high was trading on the alleged labor market/corporate strength, revised lower by 820k jobs…. it’s all smoke and mirrors and misdirection, like we witnessed in Chicago all week.
Still, the Fed is an evil band of banksters and Fleckenstein knows it. Mish has had this right for decades!
Great post Bill !
4.73% yoy Supercore inflation, right now! You know… the inflation measure they told us to watch closely two years ago.
Send a note to the FED!
What I am actually laughing at is the whining, bitching and complaining of most people here about things they cannot change. Will complaining on this blog improve your life?
You never know what important VIP’s might be reading this blog and would notice a problem they hadn’t paid any attention to!
Yes, actually. Among other things, it relieves stress and enables one to cope better with “things we cannot change”.
More importantly, social signaling does influence future behavior – more so than inflation expectations. Knowing you’re not alone can strengthen your resolve to take the actions you can in fact take.
No doubt, the Harris delegation are pleased with the Powell put.
Do people wait on imminent Fed Cuts so that they can leverage more for crap they do not need?
Jerry hitches his ponies up to Kammy’s wagon? Market goes boom, followed by bust which will of course, hurt the labor market. Inflation expectations may be something to talk about for WS strategists and bond desks, for people they see what they are paying and when its going up it sucks. Recession should bring down inflation (like now) but stagflation may not allow the problems to clear.
Irrespective of what is said at Jackson Hole, Fed policies (QE and prolonged ZIRP) have damaged the integrity of the financial system. Much has been written about QE since 2008. Most of it wrong..
At first, it was described as a simple asset swap that innocuously created bank reserves and did not affect inflation or the money supply. Then when the money supply took-off, it was claimed that it wasn’t inflationary because the money had low “velocity.”
And when inflation surged to the point that even the understated CPI couldn’t cover it up, the story became that the inflation was only transitory. When that didn’t pass the laugh test, they finally dialed back the printing press but the damage was already done.
What a heaping load of nonsense it all was. And it went on for years and some of it still to this day. As a result, we have a very unbalanced economy with untold millions struggling and unable to find affordable housing against the backdrop of monumental wealth-disparity.
To be clear, QE injected trillion$ of “cash” DIRECTLY into the asset markets and indirectly into the economy by allowing the government to spend huge sums without prohibitively high interest rates.
This enormous cash injection to investors was turbocharged by ZIRP and created a bidding pressure that has fueled an incredible advance in home and stock prices. People who don’t own assets picked up the tab with a higher cost-of-living and the inability to buy a home.
It is going to take more than a few economic policy gimmicks and unpaid for tax-cuts to correct the imbalance that has been created by essentially turning the printing press over to Wall Street.
And how did you take advantage of all this? Because you had no say in any of it; then; now; or in the future.
Joy through fed cuts. Hope through debasement
Succinct
You’re either based or debased. America is definitely debased.
Joy is the slogan they use in China, BTW.