The Fed Says Inflation Is Transitory, It Has a Vested Interest to Lie

Q&A on Fed Transitory Statements

Q: If inflation picks up will the Fed say I made a mistake or will they double down?

Q: If the Fed doubles down will they admit their mistake or will they say let’s overshoot to make up for past inflation?

Q: If the overshoot continues, will the Fed say dammit wrong again or will they say better 10% inflation than 10% unemployment

I believe we know the answers to those questions, paraphrased from the Eurointelligence post Should we worry about inflation? 

Eurointelligence authors wrote from the perspective of the ECB. 

They did not know if inflation will rise or by how much. Nor does anyone else given there are too many variables. 

Who predicted Covid-19 and the global response to it? 

From the point of view of the Euro, Eurointelligence listed a pair of alternatives.  

• “Inflation may rise in the US, and that this could affect the euro area indirectly. One scenario is for a rise in the price level in non-euro global supply chains, but without a compensating rise in the euro’s real trade-weighted exchange rate.”
• “It is also possible that counter-acting deflationary forces might neutralize or overcompensate. There exists no single indicator that tells us what will happen.”

Key Point 

“Those who are absolutely certain that inflation won’t rise are mostly the same people who couldn’t care less if it does.“

More accurately, we have no idea what the central bankers really believe, we just know what they say to the masses.

Things We Do Know

1. What the Fed says is not necessarily the same thing as what they believe.
2. The Fed’s track record on inflation predictions, housing predictions, bubbles, dot plots, and literally everything else has either been one big set of lies or one big set of misses. Perhaps it’s a combination.

Dot Plot of Fed Interest Rate Predictions December 2016

Dot Plot of Fed Interest Rate Predictions December 2017

Dot Plot of Fed Interest Rate Predictions September 2018

Dot Plot of Fed Interest Rate Predictions December 2018

Those plots are the interest rate projections of all the Fed participants on those dates along with snide remarks I made at the time.

Bernanke Flashbacks

Please recall my January 6, 2020 post Ben Bernanke Just Won’t Stop Making a Fool Out of Himself

Former Fed Chairman Ben Bernanke said the Fed has many tools to fight a recession. He also said that forwards guidance won’t work if the neutral rate is below 2%. Amusingly, his solution was to raise forward guidance.

Bernanke in His Own Words

• February 15, 2007: Chairman Bernanke said: “Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition.”
• March 28, 2007: Chairman Bernanke said: “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
• May 17, 2007: Chairman Bernanke said: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
• February 27, 2008: Chairman Bernanke said: “By later this year, housing will stop being such a big drag directly on GDP … I am satisfied with the general approach that we’re currently taking.”
• February 28, 2008: Chairman Bernanke said: “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.”
• June 9, 2008: Chairman Bernanke said: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
• July 16, 2008: Chairman Bernanke said that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Since then, Fannie Mae and Freddie Mac have received a $200 billion bailout and have been taken over by the federal government.

Fed Misunderstands Inflation

The Fed remains on a foolish mission to achieve 2% inflation.

In reality, the Fed produced massive inflation but does not know how to measure it.

Key Questions Looking Ahead?

• Is the Fed a big group of liars or are they simply that incompetent?
• Regardless, is the Fed wrong again?

Overloaded Boat

The Fed’s track record suggests there is a very strong reason to believe it is wrong again except for one thing: The boat is overloaded in near universal belief the Fed is indeed wrong again. 

On May 7, I commented Add David Rosenberg to List of Those Who Believe Inflation is Transitory

Rosenberg recalled one of Bob Farrell’s classic market rules: When all the experts and forecasts agree, something else is going to happen. The consensus has never been more lopsided, he said, and that is reflected in asset allocations that heavily weight stocks relative to bonds.

What About Wage Inflation?

 Also consider Huge Upward Wage Pressures for Both Skilled and Unskilled Labor

Lacy Hunt at Hoisington Management had this key observation. 

Mish,

Excellent analysis. I would add one point as a result of your conclusion. Older populations with declining birth rates and slower population, depress household, business and public investment. The contracting effect on investment is highly deflationary and overwhelms the impact of inflation due to the smaller labor force. This condition is plainly evident in Japan and Europe. Moreover, this pattern will be increasingly apparent in the US.

Finally, central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Mish