Atlanta Fed President, Raphael Bostic, is concerned about another round of inflation caused by “Pent-Up Exuberance”.
Three Realities
Please consider Three Economic Realities That Make Me Grateful yet Vigilant by Raphael Bostic.
So, where is my attention, or worry, focused these days?
Inflation has slowed but risks remain
Message one begins with price stability. Inflation decelerated more quickly than even optimists expected over the past year, declining from over 5 percent to 2.6 percent during 2023, as measured by the Fed’s preferred yardstick, the Personal Consumption Expenditures (PCE) price index.
Typically, unemployment rises when the Fed tightens monetary policy to subdue outbreaks of inflation like the one we experienced beginning in 2021. So, a return to price stability without deep economic pain would constitute a resounding success by historical standards.
Just how different is this episode? Research tells us that when the Fed tightened policy aggressively in previous cycles, the unemployment rate rose by about 1.5 percentage points, on average. That hasn’t happened this time, so far at least. When the Committee began raising the federal funds rate in March 2022, unemployment was 3.6 percent. After 11 rate hikes, January’s unemployment rate stood at 3.7 percent.
The story is similar for economic growth. Econometric evidence suggests that past tightening cycles led to about a half-percentage-point decline in real gross domestic product over two to two-and-a-half years—a recession, basically. Bucking that history, real GDP grew at a 3.3 percent annual rate in the fourth quarter of 2023 by the Bureau of Economic Analysis’s initial estimate, and at a 3.1 percent clip for all of 2023. That’s a more robust performance than private sector forecasts anticipated and, quite frankly, more robust than what we at the Atlanta Fed expected.
As promising as that all sounds, the resounding success I mentioned—a return to price stability without economic pain—is hardly assured. That is largely thanks to the second of my three points: because uncertainty is rampant in the domestic and global economies, it is premature to claim victory in the fight against inflation.
January inflation readings came in surprisingly high, the latest reminder that the path to price stability is not a straight line. I need to see more progress to feel fully confident that inflation is on a sure path to averaging 2 percent over time. Only when I gain that confidence will I feel the time is right to begin lowering the federal funds rate to dial back restrictive monetary policy.
That brings me to my third point. Uncertainty emanates from widely varying risks. Some risks stem from good economic news. These are what economists would call “upside risks” to my economic and policy outlook, and continued strong progress on inflation and job growth count among them.
There is another upside risk I’ll highlight. As my staff and I have talked to business decision-makers in recent weeks, the theme we’ve heard rings of expectant optimism. Despite business activity broadly moderating, firms are not distressed. Instead, many executives tell us they are on pause, ready to deploy assets and ramp up hiring when the time is right.
I asked one gathering of business leaders if they were ready to pounce at the first hint of an interest rate cut. The response was an overwhelming “yes.”
If that scenario were to unfold on a large scale, it holds the potential to unleash a burst of new demand that could reverse the progress toward rebalancing supply and demand. That would create upward pressure on prices. This threat of what I’ll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months.
Price pressures are still widespread
Further, while headline inflation is moving in the right direction, a closer analysis reveals that it’s not time to give the all-clear signal. First, the number of individual prices that are climbing briskly is still higher than we typically see when inflation is under control. The share of items in the PCE price index rising at rates above 5 percent remains well above the roughly 20 percent share that would be consistent with inflation at its target. So, price pressures are still a little broader than I’d prefer.
In view of the policy context I’ve described, my watchwords now are grateful and vigilant. I am grateful for the substantial progress we have seen in reducing the inflation rate toward the Committee’s target of an average of 2 percent over time. Yet I am vigilant in continually staying on the lookout for developments that could derail that hard-won progress
Over the Rainbow
Some have no concerns at all. For example, let’s check in with former Fed Vice-Chair Alan Blinder and his soft landing thesis.
Alan Blinder is somewhere over the rainbow as noted in Hoot of the Day “The Fed Has Reached the Soft Landing Runway”
While the market is widely cheering a soft landing, there are plenty of reasons to believe that view is wrong.
The market focus and that of many economic writers is on rent. For over two years I have heard that rent is falling (it isn’t), or is about to (perhaps).
The spotlight is due to the fact that rent plus Owners’ Equivalent Rent (OER) are over 36 percent of the CPI.
However, even if rent stabilizes, food, energy, and medical services all appear to have bottomed and are headed back up.
Car insurance ad home insurance prices are a disaster.
70 Percent of the CPI Is Sticky
Some prices change frequently, notably gasoline. Most of the CPI changes infrequently. This post takes a look at the Atlanta Fed Sticky price project.
On February 26, I noted 70 Percent of the CPI Is Sticky, Including Rent, Insurance, Food Away From Home
OK rent is lagging. But tell that that to the cash strapped renter who sees this chart.
CPI Month-Over-Month
For the 29th consecutive month rent was up at least 0.4 percent. Shelter, a broader category, rose 0.6 percent. Food rose 0.4 percent.
Hotter Than Expected
- The CPI was hotter than expected in January, up 0.3 percent vs a Bloomberg consensus expectation of 0.2 percent.
- All items excluding food and energy rose 0.4 percent vs an expected 0.3 percent.
- Year-over-year the CPI rose 3.1 percent vs an expected 3.0 percent.
- Year-over-year the CPI excluding food and energy rose 3.9 percent vs an expected 3.7 percent.
For discussion please see Another Hotter Than Expected CPI Led by Shelter, Up Another 0.6 Percent
Energy declined 0.9 percent for the month preventing a disastrous headline number.
Factor in Bidenomics
In addition to the mess the Fed made in housing, one needs to factor in the inflationary impacts of Bidenomics.
Our net zero lesson of the day on February 6 was The True Costs of Net Zero Are Becoming Impossible to Hide
And budget deficits are out of sight.
The Amazing Trajectory of the Federal Debt vs Population Growth
The following chart shows federal debt vs population growth. It’s a vivid reminder of the unwillingness of Congress and either party to put an end to unrestrained spending.
Federal Debt vs Population 1992 vs Now
- In 1992, the federal debt was $4.027 trillion. The population was 192.805 million.
- At the end of 2023, federal debt was $32.690 trillion and the population was 266.942 million.
- Between 2019 and 2023, the federal debt rose by 45.3 percent. The population rose by 3.0 percent.
For discussion, please see The Amazing Trajectory of the Federal Debt vs Population Growth
This isn’t 2001 or 2009. This is 2024.
Global wage arbitrage and just in time manufacturing have been replaced by Bidenomics and huge pay increases.
Boomer demographics means more demand for health care services. Boomer retirements stress the labor pool.
The Fed’s Big Problem
On average, the economy looks OK. But averages are misleading. Several large groups of people are struggling. They all have one thing in common.
The Fed’s Big Problem is There Are Two Economies But Only One Interest Rate
I keep returning to that chart because it is a problem of the Fed’s own making. If the Fed cuts rates now, what happens to home prices?
Perhaps it will be a sell the news reaction on home prices but there is no reason to expect that.
Finally, inflation matters, not just consumer inflation. We are in this mess because the Fed does not understand that simple statement.
So, no, it’s not appropriate to cut rates now.
Inflation can definitely NOT go down in over the eyeballs endebted nations (US, EU) throwing bilions down the drain, supporting idiotic social projects, green reconversion and endless war! Don t worry though, some will get filthy rich in the process while most people s money will simply evaporate …..that s life, on a average historical base ! Btw, got gold , or LOL, bitcoin even?…Well, maybe canned food and water s a better option for a near future that looks everything but great …..except for some happy few maybe….
Inflation isn’t coming down anytime soon. Cost of insurance (medical, housing, auto, etc.) will keep inflation elevated for the foreseeable future. Government inflation data is BS.
They keep saying average 2% over time but never give a time frame.
It’s like the one task that never leaves the “in process” category on a status report.
Only one task?
You folks are doing great!
The economy is being run in reverse.
Powell: “When times are good in the economy, banks and other lenders tend to have a lot of money to LEND. And in case you didn’t realize, banks are in the business of making money off of loans. So, if they can LEND to more people who they believe will pay them back on time, they’ll make more money.
But right now it’s costing banks more to get the funds they need to make loans. Part of that goes back to the Fed’s interest rate hikes. But the other part comes from the recent bank failures. Since many depositors withdrew money from mid-size and regional banks, these banks have less money to LEND.”
There is no question here as to which is cause and which is effect. The acquisition of earning assets by the banks, except where interbank transactions are involved, ALWAYS brings about an expansion in the money supply, ceteris paribus. The banks do not acquire earning assets through the utilization of voluntary savings, rather do they acquire such assets through the creation of new money.
Every time a bank buys securities from, or makes loans to, the nonbank public, it creates new money – demand deposits, somewhere in the payment’s system.
It’s a confusion of microeconomics with macroeconomics.
The FED’s technical staff conflates micro with macro. Thus, they can’t differentiate how the system works. From the standpoint of the system, banks don’t lend deposits. Bank-held savings have a zero payments velocity.
See: BANKS DON’T LEND MONEY (youtube.com) Dr. Richard Werner
That’s the basis for Dr. Philip George’s “The Riddle of Money Finally Solved”
There’s been a “sea change”. The composition of the money stock has reversed secular stagnation, the impoundment of savings in the banks.
Link: George Garvey:
Deposit Velocity and Its Significance (stlouisfed.org)
“Obviously, velocity of total deposits, including time deposits, is considerably lower than that computed for demand deposits alone. The precise difference between the two sets of ratios would depend on the relative share of time deposits in the total as well as on the respective turnover rates of the two types of deposits.”
The ratio of transaction deposits to gated deposits has reversed by 18%. That has raised the growth of N-gDp.
Retail MMMFs are nonbanks. Mises has it right:
“The definition of M2 includes money market securities, mutual funds, and other time deposits. However, an investment in a mutual fund is in fact an investment in various money market instruments. The quantity of money is not altered as a result of this investment; the ownership of money has only changed temporarily. Hence, including mutual funds as part of M2 results in the double counting of money.”
see: “Correlations and the Definition of the Money Supply”
October 19, 2023
link to misesfans.org
The FED’s technical staff doesn’t know a debit from a credit. Just like MSB deposits were misclassified (included in the tabulations of the money stock), from 1913 to 1980, MMMFs deposits should not be classified in M2.
TOWARD A MORE MEANINGFUL STATISTICAL CONCEPT OF THE MONEY SUPPLY Leland J. Pritchard
First published: March 1954
So, O/N RRPs are misrepresented. Thus, the conventional wisdom is wrong:
“O/N RRPs do not affect the size of the money stock, but they do affect its composition1. When counterparties lend cash to the Fed, they reduce the amount of reserve balances on the liability side of the Fed’s balance sheet and increase the amount of reverse repo obligations1. This means that there is less money available for lending in the private market, which can put upward pressure on interest rates”
According to the Federal Reserve Bank of Chicago’s “Modern Money Mechanics”:
“If the buyer of a reverse repo or a security sold by the Fed is a nonbank (which 90% of RRPs are), and pays for the purchase using its bank account, the money supply is directly affected”.
Both money and reserves are increased. The FED has been supplying liquidity to the markets.
In almost every instance in which Keynes wrote the term bank in his General Theory, it is necessary to substitute the term nonbank in order to make his statement correct.
I have suggested for a few months now that the rate of inflation was going to begin to tick higher as oil, RBOB and ULSD prices continued to rise on a monthly basis since December.
As expected, MoM prices have trended higher in the CPI, PPI and PCE reports with the MoM change now being the highest we’ve seen in several months and upwards of 6 months.
We’re seeing the 3 and 6 month annualized rates tick higher as well with every report released and I trust we are going to see that happen again when the CPI and PPI reports for February are released next week.
One need only look at nationwide and state gasoline prices to see that prises have been ticking higher for several weeks now with the MoM price increases picking up speed, so to speak.
As of today, 24 states and DC are seeing prices higher YoY for anywhere from one grade of gasoline to all three grades of gasoline.
Diesel prices have yet to be higher YoY, but many states and the nation are inching closer by the day.
If YoY gasoline and diesel prices continue to grow, this is going to negatively impact the rate of inflation and at some point, the rate of inflation YoY will begin to climb.
One may have noticed that RBOB prices spiked $0.31 when the front month contract rolled over from March to April and unless current prices retrace that spike in prices, we’re gonig to prices at the pump continue to increase.
I’d suggest that we are going to see the rate in inflation continue to climb on a MoM basis and on a 3 and 6 month annualized basis.
At the PPI level, we saw intermediate demand prices increase quite a bit in January compared to what they had been doing for several months previously when the MoM prices were actually declining.
I would think we can expect this trend to continue when we see next weeks report.
As we all know, rising fuel prices tend to increase the prices of everything else, so unless something changes regarding fuel prices, we’re going to see high YoY prices in the coming months.
Waller: “when a central bank uses reserves to pay for government securities, it is decreasing the supply of these securities to private investors, which will bid up the price and lower the interest rate on government securities.”
Speech by Governor Waller on thoughts on quantitative tightening, including remarks on the paper “Quantitative Tightening around the Globe: What Have We Learned?” – Federal Reserve Board
Deliberately stoking asset prices was a monetary policy blunder. In the circular flow of income, you need higher and firmer real rates of interest for saver-holders. Then monetary savings need expeditiously activated into real investment outlets, aka, in the U.S. Golden Age in Capitalism.
Lori Logan, past manager of the System Open Market Account, doesn’t know how the system works.
Logan is wrong: “But in an efficient system, the costs of liquidity should be similar for banks and non-banks.”
The Atlanta Fed on “Pent-Up Exuberance” and Threat of More Inflation – MishTalk
The banks could continue to lend even if the nonbank public ceased to save altogether. Savings aren’t synonymous with the money supply. From the standpoint of the commercial banks the savings practices of the public are reflected in the velocity of their deposits, and not in their volume.
see: Ample reserves and the Friedman rule – Dallasfed.org
re: “If the Fed cuts rates now, what happens to home prices?”
Interest is the price of credit. The price of money is the reciprocal of the price level. Prior to the GFC, Bernanke cut interest rates, but housing prices still fell.
Both stagflation and secular stagnation were predicted in 1961. But the ABA censored those economists.
The biggest error in the history of mankind is that banks lend deposits.
To the unthinking, money is tight. Not so. The FED’s technical staff doesn’t know a debit from a credit. And because of the unsupportable and unsustainable deficits, QE is on the horizon.
We can, if we want, minimize money velocity, and go back to the days when a savings account was just that – and not an adjunct to our checking accounts.
Services PMI in, jumps 52.3 vs 51.3, and it’s labor intense explosive!
link to pmi.spglobal.com
For the first time in eighty years a war broke out in Europe (not really). The European leaders no longer rely on the US. After Trump threats they raised their defense budget to $2T. $2T isn’t good enough. They asked for more. The US is doubling down bc we are so depleted. New systems, new plans after Jaza and Ukraine. Bostic : inflation beyond the horizon. NATO “Independence Day” might lead to its breakup.
“Boomer retirements stress the labor pool.”
Yes, and whether the Fed hikes or cuts becomes irrelevant if there aren’t enough people to work. The net result is bidding wars for talent and businesses that don’t have deep pockets will lose business or shut down. All that will be left are mega corporations with deep pockets or niche small businesses.
The future is global corporatocracy. I think the Robocop movies got it right. Got Mag7 or S&P500 stock?
“It’s turtles all the way down and inflation all the way up!”
As for robots or AI, well those will be controlled by two or three companies and they will have a subscription and revenue model the way apple takes 30% of every sale so good luck with robots and AI. Yes it’s bleak but well positioned investors should sit happy and fat.
Google, flush with cash, is cutting jobs. Says a lot.
Anyone that believes the Fed will cut does not understand the impact of war on inflation, or they think peace will break out, which means they do not understand who is pulling the strings. The diversion of war is needed because the economic system is collapsing. Who thinks the Nutjobs in charge will ever admit they, or their Marxist ideology, are wrong?
The current bout of inflation is not the Fed’s fault, it’s caused by the Federal government’s reckless spending. It will become the Fed’s fault if they step in and support Biden’s reckless spending.
The big questionn is, will the Fed support the up coming Treasury auctions? If not, interest rates are headed higher and a crash is coming. If they restart QE, inflation will explode. We are between a rock and a hard place.
Actually it’s really easy. Keep raising FFR and roll off illegal balance sheet at 5x the current rate. It will hurt the inflated bubble chasers but who cares. People need to flee to safety instead of YOLO and FOMO.
With that said the FED are bought and paid for and gutless so they will jawbone and convince people they are stuck and between a rock and a hard place and that a goldilocks landing is coming…… as real 8% inflation continues to crush most
Employment is rising because two 25hr/week Zoomers do not replace one retiring Boomer.
Boomers were never hard workers to begin with.
Where are your cartoon posts?
In the meantime….
link to youtube.com
Doug knows because he’s a boomer and was a major screw off.
Says the coddled baby of boomer parents
To begin with they were I don’t know about nowadays.
– Atlanta Fed President, Raphael Bostic, is concerned about another round of inflation.
> Hmm.. Maybe he should have strongly suggested that they pay attention to that when it was happening. Now it’s too late, until we pay the piper for what’s been done already. Of course he’s concerned, as he screwed up and wasn’t paying attention.
Three Realities ***
* Inflation has slowed but risks remain.
– Just how different is this episode?
> Not very as you can see. As is typical these days, and with this administration from the start, incompetence is the go to development. Not surprisingly at all, that they still have not a clue…
– When the Committee began raising the federal funds rate in March 2022, unemployment was 3.6 percent. After 11 rate hikes, January’s unemployment rate stood at 3.7 percent.
> Clueless
– That’s a more robust performance than private sector forecasts anticipated.
> Clueless
– That’s more robust than what we at the Atlanta Fed expected.
> Clueless
** My second point: because uncertainty is rampant in the domestic and global economies.
– It is premature to claim victory in the fight against inflation.January inflation readings came in surprisingly high, so I need to see more progress to feel fully confident that inflation is on a sure path to averaging 2 percent over time. Only when I gain that confidence will I feel the time is right.
> Clueless
*** My third point.
– Uncertainty emanates from widely varying risks. As many executives tell us they are on pause. Price pressures are still widespread. number of individual prices that are climbing briskly is still higher than we typically see when inflation is under control. The share of items in the PCE price index rising at rates above 5 percent remains well above the roughly 20 percent share that would be consistent with inflation at its target. Price pressures are still a little broader than I’d prefer.
> Clueless
Over the Rainbow
– Alan Blinder is somewhere over the rainbow. While the market is widely cheering a soft landing, there are Hundreds of reasons to believe that view is wrong. For over two years I have heard that rent is falling (it isn’t).
> Clueless. The spotlight is due to the fact that food, energy are headed back up. Car insurance ad home insurance prices are a disaster. For the 29th consecutive month rent was up at least 0.4 percent. Shelter, a broader category, rose 0.6 percent. The CPI was hotter than expected in January, up 0.3 percent.
– Factor in Bidenomics
> Totally Clueless
Business leaders sound optimistic, but they cut full time jobs and working hours. That is still not good enough. bc businesses cannot cont to foist higher prices on consumers.
Business Leaders always sound optimistic, when nothing is going right. It’s called projection, and the Government is way better at it, but business leaders are catching on…
You may see comments like the following over the coming weeks and months:
– Cut backs are necessary due to technology advancements that are making life better for everyone.
– More and more children are graduating from College, and they are skilled and ready for the workplace, so expect big things coming your way.
– CRE is slowing, due to so many new hires working from home. We no longer require the office space, because we have so much work to do from home still.
– Rent is rising to keep up with the Pay Rate folks are getting now. The more the people make, the more they can pay for Rent, EV’s, Going Out Etc. So businesses are just seizing on the opportunities.
You know what I mean…
There will be a considerable amount of foisting done in the next few years.
The Muslim Brotherhood spread radical Islam “re-education and propaganda” in every college and town. Obama welcomed Muslim Brotherhood Muhamed Morsi of Egypt. Erdogan was Obama most influential teacher while he was the president. Assad slaughtered them in the 80’s. Al Sisi got tired of Hamas. Yesterday Egypt sentence to death in hanging 38 Muslim Bros leaders. Qatar might kick Hamas billionaires out of Dokha.
The radical Muslim Bros movement might tremble the US and Europe during the Ramadan, flexing their muscles. Biden is fed up with Bibi & Sinwar, but Erdogan isn’t running Biden’s white house
1) During the oil glut, between the 1980’s and the 1990’s, when energy was plenty and China was working for free, exporting deflation : home prices, rent and earnings rose in unison, in a low slog up.
2) Between 2000 and 2008 when oil rose to $147, when every poor person deserved a house, C/S popped up, rent and earnings rose in unison, still glued together.
3) When the Fed raided people’s bank accounts, everything was unglued : home prices, rent, earnings and the stock markets, all disconnected. The pressure is up. Things can suddenly blow up.
My rent in California is set to increase 8.8% in 60 days. Your 0.4%/month rent increase is too low.
Stick it to the sticky, Rent CPI : rent of primary resident + OER northeast + OER midwest + OER south + OER west. Total bs.
Recreation and food away from home can be cut.
Rigs count is down. Oil and NG production is up to a new all time high. We are number #1 in the world using DUCs depleting DUCs inventory. It will take years to replenish rigs count. The easy to extract is gone. The ratio Natgas:SPX sank to nadir. When recovered ==> lower production, shortages, inflation in the recession.
Rig counts have little to do with volume of oil produced thanks to how fracking works.
Opinions from Raphael Bostic, the Fed member who twice neglected the restriction of no trading during the Fed’s blackout window. The Fed’s internal investigation found him error-free both times. So Bostic retains his half a million dollar job. He is the ideal person to recite the Fed’s PR. Although, Bostic was removed as a voting member. In Bostic’s absence, Mary Daly was promoted to voting status, a reward for her egregious failure to monitor SVB.
It’s their bubble They don’t make mistakes. Intentional
All of this shit aiming at convincing us that they CAN affect the numbers – – and we know that the Numbers are all a CROCK OF SHIT and LIES.
two trillion dollars in stimulus/deficit spending in a “growing” economy, tight labor market, and financial exuberance, is anyone surprise.
fun fact of the week: the feds are adding one trillion dollars to the federal debt every 95 days
The feds are subtracting one trillion dollars from your purchasing power every 95 days.
Is pent-up exuberance same as irrational exuberance? Of course it is. In Greenspan’s case, it was a 3-year ahead warning, whereupon the Nasdaq 100 lost 83%. Not a misprint. Are we 3 years out? Valuations say it is already September of 1929.
29 was caused, at least in part, by too low of interest rates for too long. Absent traditional inflation allowed the Feds to keep the good times rolling, ignoring financial asset inflation until it was too late
There is no financial inflation, only “growth.”
That’s why the market never goes down.
It’s just folks “taking profits.”
“Pent up exuberance” is a great euphemism for willingness to take business chances based on financing instead of consumer demand.
Great point about the use of euphemisms! “Pent up exuberance” also = “malinvestment,” “gambling,” “recklessness,” “putting cash to work in any asset class except rapidly devaluing Ameripesos.” 🙂
What about the “steady-state” exuberance?