Bloomberg reports Powell Aims to Dodge Japan Deflation Trap With Dovish Fed Tilt.
Declaring that too-low inflation was “one of the major challenges of our time,’’ Powell left open the possibility on Wednesday that the Fed’s next interest-rate move might be a cut after four increases last year.
The world’s most powerful monetary policy maker also sketched out a harmful scenario in which consumers and companies lose faith in the Fed’s ability to hit its 2 percent inflation target.
“If inflation expectations are below 2 percent, they’re always going to be pulling inflation down and we’re going to be paddling upstream’’ to keep prices up, he told reporters after the Fed unexpectedly scrapped its forecast of any rate hikes this year.
“I don’t feel we have kind of convincingly achieved our 2 percent mandate in a symmetric way,’’ Powell said after the Fed left its benchmark policy rate in a range of 2.25 percent to 2.5 percent.
Powell confessed that there is “no easy answer’’ to explain why price rises have been so subdued. Two possible reasons he cited were that the labor market might not be as tight as policy makers believe or inflation expectations might have slipped lower.
Absurd Discussion
The entire discussion is so absurd it’s hard to know where to start, but let’s start with a simple translation.
Powell: Inflation is one of the major challenges of our time.
Translation: One of the major problems of our time is your dollar is worth too much. The dollar buys too many good and services.
The Fed would be very pleased if your dollar was worth less and less each and every year.
Make no mistake. That is precisely what Powell is saying.
Easy Answers
The Fed has no easy answers as to why it cannot destroy the purchasing power of the dollar as much as he would like.
Since Powell does not know, I will tell you:
- Every central bank in the world is out to debase their currency.
- When central banks all do the same or similar things, not much happens. The market looks at deficits, budgets, overall debt, and interest rates and concludes the dollar is worth increasingly more than the Euro and Yen.
- A strong dollar holds down import prices counteracting some of the inflationary trends of excessive US deficit spending.
US Dollar Index
The dollar is up 21% since mid-2011.
You might agree or disagree whether or not that should be happening, but it is.
I suggest it’s warranted. The Fed is the only central that that was hiking. Then, just as the ECB was ready to taper asset purchases, which would have boosted the Euro, the ECB backed off.
The modest rise of the dollar in 2019 even counteracted some of Trump’s tariffs.
Phillips Curve
Why the Fed cannot figure out the obvious is not a mystery either.
The Fed places absurd faith in the discredited Phillips Curve which suggests there should be a wage price spiral in place.
Phillips Curve Curiosities
- Fed Study Shows Phillips Curve Is Useless: Admitting the Obvious
- Yet Another Fed Study Concludes Phillip’s Curve is Nonsense
- Economic Stupidity and Fed Groupthink Remain “Well-Anchored”
Despite numerous studies proving the Phillips Curve is nonsense, including two by the Fed, the Fed governors have not abandoned the idea.
Also consider Rethinking the Fed’s 2% Inflation Target: Spotlight On an Absurd Debate.
Hello Jerome Powell
Powell cited “inflation expectations” as the second possible reason for lack of inflation.
That notion is equally absurd, if not even more absurd.
I addressed inflation expectations in Hello Jerome Powell, We Have Questions.
If you have not done so, or if you need a refresher course, please give that a look.
The bottom line is the Fed has three bad economic models: regarding Deflation Group-Think, Inflation Expectations, and thePhillips Curve.
I sent my question list to the Fed. They did not respond or even acknowledge my email.
With three bad economic models, it is no wonder the Fed is puzzled.
By the way, there is plenty of inflation, in assets, but the Fed doesn’t count that. But as part of its asymmetric policy, the Fed is guaranteed to respond to a sinking stock market.
Mike “Mish” Shedlock
April CPI for health insurance up over 10% year over year.
It is hard to enforce more toxic inflation on a massive peasantry that is already destitute from decades of that same inflation.
Of course the fed can inflate more, but depression is the only actual result.
Powell: Inflation is one of the major challenges of our time.
The FED’s major challenge is having it’s cake and eating it, too.
The argument is that the FEDsters can’t possibly be that stupid, so they must be lying. I am not quite sure.
From today’s NYT story re: the billionaire paying off the Morehouse college class of 2019 student loans, it seems that there is/was a lot of inflation in education! But then the Fed probably doesn’t count education, just as it ignores food and energy. It’s easy to stack the deck if you exclude the right categories from measurement. Sheeze.
“Over the past 20 years, average tuition and fees at private four-year colleges rose 58 percent, after accounting for inflation, while tuition at four-year public colleges increased even more, by more than 100 percent, according to research from the College Board.”
Well, inflation eats everything, including your debt. If you have a lot of debt and essentially no savings in cash, which would probably be most people, then inflation could be your friend. Deflation makes your debt bigger, while you can charge your customers less and your salary is probably declining. In the end, inflation or deflation are only symptoms of the health of the underlying economy.
Just think how much stronger the dollar would be if the Fed was competent. If one is aware of the massive amount of dollar-based debt abroad, they would understand it is a stronger dollar, not a weak one, that will cause the economic reset.
“the Fed is guaranteed to respond to a sinking stock market.”
Doubtful, as the decline will not be that great through the end of the year. What they will be forced to do is raise rates to avoid being labeled a serial bubble blower, as stocks start their next major rise after the first of the year, when foreign capital really starts to run for cover. Again, I will ask, what other option does the big money have – unbacked govt debt with little yield, or blue chip companies backed by plant, property, equipment, and IP? FYI, the yield on the DOW is about the same as the 10-yr treasury.
Education, medical care, homes, cars – all prices are falling year after year in Powell’s alternate no inflation universe. Meanwhile, on planet Earth,….
The Kingdom of Moltz narrative keeps the peasants satisfied (they think).
Inflation in the US as USD$, of which trillions exist overseas, come back to the US.
Deflation everywhere else as China floods the world with cheap goods they can no longer sell in the US.
Chinese exporters operate a large volume / small margin model. There is little scope to drop prices at this point — at least while remaining profitable.
If they pumped money to middle class they would spend it and create inflation. Wealthy just invest it in stocks
It’s coming. It’s called MMT. Once the broad mindset changes though it’s game over.
Real life inflation will never be documented in the fake numbers the monetary politburo publishes. Meanwhile your savings and purchasing power declines while the value of their govt debt declines. This is the reason why the ivory tower wizards would love to eliminate cash. They can debit your digital savings account and slowly reduce their debts at your expense. What could go wrong.
The Fed squeals deflation while my local inflation is 25%.