Raging Debate: How Serious is the Fed About Inflation?

March 19, 2022

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2:30 pm

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44 comments

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Economics

Fed Chair Jerome Powell from Fed image file, annotation by Mish

Serious Debate

Good Lord

If this Fed was serious it would have done 50BPs in March, it would have done QT instead of postponing it, there would have been more dissents.

Powell walked back 50 BPs in March after it was priced in!

We have serious bullsheet, not a Fed serious about inflation.

— Mike “Mish” Shedlock (@MishGEA) March 19, 2022

Serious Bullsheet

That is where we are. And that is where the Fed always has been ever since Volcker.

Five Things to Expect in May

A quarter-point hike
A second dissent
Powell will announce the QT initial schedule by running down the balance sheet, not outright selling
QT will not even start immediately. It’s more likely Powell will want to telegraph the start to not upset the market. So look for QT to start in June, with a natural runoff.
Powell will promise to get tough if necessary

There are three camps on what the Fed does. I respect everyone below.

Many and Faster Hikes

Jim Bianco
Macro Alf

Serious QT to Steepen the Curve

Harvey Bassman
Joseph Wang

Baby Steps

Mish
Lacy Hunt (Spoke with him Friday)
Steph Pomboy

Other than Hunt, I compiled those groups from statements or videos posted on Twitter.

If I have anyone wrong, I will be happy to switch groups or create another.

There is room for a middle ground that no one seems to have taken. That would be something like a moderate amount of QT coupled with a moderate amount of hikes, say 4 hikes plus a fair amount of QT, starting slowly.

There is also room for a superman group: 6 or more hikes plus a heavy amount of QT.

In May we will see how serious the Fed is.

The more serious the Fed is, the more likely a recession starts this year, not next.

For more on why I think the Fed won’t get serious, please see Existing Home Sales Dive 7.2 Percent Wiping Out January’s Big Month

This post originated at MishTalk.Com.

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StukiMoi

2 years ago

The Fed has always been serious about inflation. After all, inflating is the only thing they have ever done, and will ever do. Inflation is, in fact, the only product they produce. Producing inflation, as well as redistributing the wealth which this inflation confiscates; to the “right”, meaning regime connected, people, from productive ones who created it; is specifically the only reason why The Fed exists in the first place.

If some mythical Fed should appear, who were concerned about REDUCING inflation, that mythical Fed would simply stop inflating. It’s not exactly rocket science. At least not for the literate among us. Money is either printed, or lent into existence. In the latter case, with The Fed providing explicit guarantees that lent-into-existence money, will also be printed if “need” be. Reducing inflation, isn’t harder than simply no longer doing any printing.

Of course, since The Fed is, in fact, only serious about maximizing inflation, constrained only by what they feel they can get away BSing to the economically illiterate and not so intelligent about, they will never be concerned about reducing inflation. At least not unless they are starting to worry things are getting so far out of hand, that the above, sole, constraint, is being pressured.

Paul T.

2 years ago

Reply to StukiMoi

I once asked a friend that worked at Deutsche Bank why we had inflation. Looked at me like a deer caught in the headlights. Didn’t get an answer. I agree with you, StukiMoi. Believe national debt was around 9 Trillion dollars in 2008, less than 13 years later, slightly over 30 Trillion dollars. Fed will not do anything about inflation, just a dog and pony show.

MPO45

2 years ago

If I recall the “baby step” camp was wrong about inflation being transitory and I’ll assume it will be wrong about inflation and the fed this time around too. Rather than read what the Fed keeps blabbering perhaps everyone here should read public companies quarterly reports and hear what the CEOs and CFOs are saying. I’ll give you a hint: “Inflation bad and getting worse.” Labor, raw materials and everything else keeps costing more, we are entering an inflation up spiral. Don’t be surprised if we blow past $15/hour and jump right into $30/hour next year or even later this year. Yeah, yeah, I know “demand destruction blah blah blah” but it hasn’t show up so far has it? There are 8 billion people screaming for goods and services and growing, what 330 million Americans do (or consume) is becoming more irrelevant every day.

Of course, city riots across America can change that in a heartbeat and so can world war III or any nuke going off anywhere. Lot’s of negative risks and probabilities. It’s only a matter a time before hoarding starts IMHO.

JeffD

2 years ago

Reply to MPO45

Hoarding has already started, and what people are hoarding is real estate and commodities.

Christoball

2 years ago

Reply to JeffD

Fun Fact. Before the collapse of the Japanese markets in 1990, Japanese were hoarding Real Estate such that the prices in Tokyo went so high; that the market value of Tokyo Real Estate was worth more than all the real estate in America combined.

Christoball

2 years ago

Reply to Christoball

How did that work out for them?????

Lisa_Hooker

2 years ago

Reply to MPO45

Folks are still “stocking” up and hoarding equities too. It’s been going on for years. They also did it in the mid-90’s to 2000 but that didn’t turn out as they expected.

FromBrussels

2 years ago

Inflation might turn out to be a luxury problem when compared with the problems coming our way…..unless you think that we re fn civilized by now ….even after 10K years of agricultural, industrial, informatical, or whatever evolution, civilization is merely a thin veneer …the near future is about to show …. Intrinsically and genetically we still remain animals, predators even, when necessary …..the future will show ….and forget it , printed money will not save our as ses ….. this time

Billy

2 years ago

Just as serious as when he said inflation is transitory. The amount of manipulation our government has done through the media, big tech, Fed, and only they know what else, is enough for us to know what they say has 2 or three other agendas behind it.

For example, the current war is painting Russia bad. Mainly Putin. 30 years ago we would be calling them commies and blaming it on Communist countries. I feel that because we have adapted more and more socialist ideas that they no longer want Communism to be negatively viewed. Or any type of big government.

Jerome and the Fed are scapegoats for the failure or leadership from 98% of our representatives over the last 35 years.

By the time we realize that Gold/Silver is a way to protect our wealth it’ll be too late.

FlyNavy1

2 years ago

I thought history has proven government control of an economy has never worked? Thought I read that somewhere…

Zardoz

2 years ago

Reply to FlyNavy1

Well let’s see what happens when Pooty poot reopens their stock market. Perhaps things will go well?

Carl_R

2 years ago

I would say that the FED is very, very serious about reducing inflation. However, I would also say that they believe that inflation is going to come down on it’s own, so they will take baby steps, mostly symbolic. If inflation doesn’t go away, then the question of what they will do gets harder, and what the answer is, I don’t know. Put me in Mish’s camp for now, but if inflation keeps rising in the face of symbolic raises, the possibility exists that they will raise more aggressively, and steepen the curve as well.

JeffD

2 years ago

Reply to Carl_R

CPI is four percent above prime rate. That means every loan, whatever it is used for, has at least a 4% return. Inflation will keep rising until that is fixed.

Carl_R

2 years ago

Reply to JeffD

Like you, I am skeptical that inflation will come down on it’s own. The Fed seems to think it will be down to 4.5% a year from now, a far cry from their earlier forecast that it would be back to 2% in a year, but still, not too serious. Yet, look at the Moore Inflation Predictor, which computes “baked in” inflation, and they predict about 7.2% a year from now, with a possibility that it could be as high as over 11% “if the Fed is too slow”, and no chance at all of 4.5%.

link to fintrend.com

Since it seems inevitable that the Fed will be too slow, making symbolic baby steps, rather than taking aggressive action, the 11% prediction may be where we end up. Yes, the Fed has the power to prevent the 11% by acting more aggressively. Aggressive action would trigger a recession, of course, but a recession also kills inflation. For many years we have been in a cycle of globalization, where governments could deficit spend to the moon, and not drive inflation over 2%, but thanks to Covid, and events like Ukraine, we are seeing the problems from exporting too much production, and I expect de-globalization in the years ahead, meaning that old fashioned economic principles are in play again, and we can no longer have our cake and eat it, too. Deficit spending will stimulate the economy, but lead to inflation. Inflation can be controlled by reducing spending or raising interest rates, either of which can trigger recessions.

Lisa_Hooker

2 years ago

Reply to Carl_R

There is no guarantee that a recession will kill inflation.

It is called stagflation and we have been there before.

Carl_R

2 years ago

Reply to Lisa_Hooker

Yes, very well remember stagflation. Do you recall what the solution to stagflation was? Volker raised the interest rates, and raised them, until he killed inflation, and provoked a recession in the process. I would say that we are in danger of arriving at staglation if we stay on the current path, and the result may be that the only answer is to make interest rates very high. Recall, though, that in 1982, the high rates killed the stock market, and drove the average PE down to about 8, if my memory is correct, the buying opportunity of a lifetime. History never repeats, exactly, but often there are similarities.

Zardoz

2 years ago

They’re Desperate, but not Serious.

FlyNavy1

2 years ago

Reply to Zardoz

That’s the title of an Adam Ant song.

Zardoz

2 years ago

Reply to FlyNavy1

He’s an unsung prophet

Casual_Observer2020

2 years ago

The last time they tried to taper in 2018 the markets went crazy and they stopped. I expect to see less tapering and more just straight rate hikes.

Most of the inflation we see is because of the elephant in the markets known as derivatives. This is the biggest reason the Fed is stuck. Until we go back to regulations prior to 1999, we will be stuck with inflation. The banks took over the economy then and we’ve been in these constantly speculative bubbles. The Fed has been pampering over them like playing whack a mole. We are headed well down the path of Japan.

vanderlyn

2 years ago

Reply to Casual_Observer2020

great point sir. glass steagall ripped apart bipartisan effort under clinton pen……………..was the beginning of the ascent of another 1920s style bubble of all bubbles. i keep telling my clueless pals,, timberrrrrrrrrrrrrrrrrr

Casual_Observer2020

2 years ago

In my opinion the Fed will take a little inflation for multiple reasons. A hotter economy tends to mean pension funds won’t have as big a problem.

And none of may even matter. I saw a movie last night (The Day After) about nuclear war where the Soviets fire a nuclear weapon on a NATO base and the the West retaliates. After that the world ends.

Captain Ahab

2 years ago

Reply to Casual_Observer2020

This time around, Russian nuclear torpedoes are the game changer. If you live on the East or West coasts, good luck.

Jojo

2 years ago

Reply to Captain Ahab

Forget nuclear. We’re working on antimatter bombs. Much bigger boom from a relatively small amount of AM.

JeffD

2 years ago

Reply to Jojo

Inherently unsafe/unstable, so not feasible as a weapon.

Jojo

2 years ago

Reply to JeffD

You forgot to add the word “currently”. That is why development will continue.

Doug78

2 years ago

Reply to Captain Ahab

Moby Dick will get you if you try to poke him. It is written.

JeffD

2 years ago

Reply to Casual_Observer2020

Pension funds are COLA adjusted, so on the contrary, inflation will cause them to go bust.

WTFUSA

2 years ago

About as serious as Robin Williams would be after taking an ecstasy, smoking a spliff and huffing nitrous.

The Fed’s preferred method when it comes to taking away the liquidity punch bowl is jawboning and mental games (good fed governor, bad fed governor news bites). Anything beyond that is only the minimum required to get attendance credit. The quarter point raise was nothing more than the minimum required to flash in front of congress proclaiming ‘See what we are doing to combat inflation!’ and convince the Stockholm syndrome afflicted masses that they are serious.

Jojo

2 years ago

Another opinion here:

———-

How the Fed Painted Us into a Corner

Robert F. Mulligan

– March 19, 2022

link to aier.org

Eddie_T

2 years ago

Put me in the Mish/Steph camp.

I don’t think that QT ever actually happens to any great extent….at ALL. You can’t unwind a Ponzi, and QE is a Ponzi.

Casual_Observer2020

2 years ago

Reply to Eddie_T

It also means protecting bondholders of all kinds of assets.

Zardoz

2 years ago

Reply to Eddie_T

Modern investment is all about catching the right ponzi at the right time.

Welcome to Cloud-Kookoo land, everyone!

Lisa_Hooker

2 years ago

Reply to Zardoz

Well it’s really about exiting the right ponzi at the right time – but your heart is in the right place.

Jackula

2 years ago

I agree with Mish, they would happily let asset inflation continue forever and are showing to be very reticent to do much of anything to tame CPI inflation…not very.

vanderlyn

2 years ago

the privately owned federal reserve bank of NY, which controls the operation, under the flim flam guise of government oversight of the federal reserve in DC, has only one objective or mandate or whatever word one wants to use. the objective is to keep the owners, of the FEDRESNY, the bankers and yes some unions, solvent and in high cotton. all the rest of it is pure malarkey to echo sleepy joe’s and my old uncles……………………inflation and employment is just smoke screens to keep the rubes amused and distracted from the greatest grift this side of religions. anyone who wants to understand should start with history books. the creature of jekyll island is a good little primer on the reality. keep up the good work mish. your analysis on r/e and and bubbles and markets and depressions is fantastic. i’d like some more stock or debt picks, too. it is a good game to play in.

dpy

2 years ago

Reply to vanderlyn

To put it a little differently, I think that they are in the business of increasing indebtedness of everyone incl. the government to themselves, and when the sh!t eventually hits the fan re debt maintenance, as it eventually will because the debt growth has now run awway uncontrollably, then they will have a lien on just about everything.

All this jabber about unemploment, etc., is just theater.

They know better than anyone that the system is like the Titanic after the iceberg was hit.

vanderlyn

2 years ago

Reply to dpy

great analogy. and i concur. and i am going to use that in future. hat tip to you sir/madam.

Captain Ahab

2 years ago

Reply to vanderlyn

I think he gets it. However, when the portfolio is stuffed with 10+year bonds and rates are rising (exogenous to the Fed), solvency might become an issue.

Mike 2112

2 years ago

If the US is going to weaponize the dollar via SWIFT and sanctions then the dollar has to get its legs underneath itself.

Of course there is no avoiding the dollar’s demise over the next generation or two, but the longer rates are low the quicker we get to the end of the dollar.

And for that reason the Fed and the .gov will reason that the USA will have a stronger bargaining position with friends and foes the longer the dollar remains the world’s global reserve currency.

And IMO they will reason that they need a stronger dollar.

Six000mileyear

2 years ago

The FED is afraid that China will sell US bonds and rotate into commodities. That would be a double whammy against the US economy, which the FED would then have to “stimulate” with lower interest rates and QE.

Casual_Observer2020

2 years ago

Reply to Six000mileyear

I thought this already happen after covid started and Trump kept blaming China. Oddly covid was an inflection point for all things China. It allowed Xi power o we his people and ability to change the dynamic of China.

Maximus_Minimus

2 years ago

Reply to Six000mileyear

The Chinese treasury holding have been stable at about 1T, accumulated by sweatshops to supply Americans with cheap junk. Presumably most are long dated and still pay some interest. The FED printed 4-5 trillion just by using the print button.

Undoubtedly, the Chinese are aching for a payback, but not by dumping treasuries.

Captain Ahab

2 years ago

Being serious about it, and doing what it will take to stop it (at the cost of destroying the economy)–that’s the real issue here. That the problem is of the Fed’s own making in the first place, and is indicative of either incompetent meddling, or economic models that simply do NOT work, suggests to me that the Fed solution will fail miserably.

Raging Debate: How Serious is the Fed About Inflation?

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