Future of Economy and Inflation

[RetireBy90]

So I've been thinking about the current economy and inflation.

Several problems have been involved to bring us to where we are today and where the economy will go from here. We have all the financial responses to Covid which have increased the money floating around (used to be M2); we have supply chain problems which include current closures in Asia; we have the war in Ukraine; we have a worker shortage; we have inflation and Fed raising rates and reducing it's bond holdings to fight inflation.
So what happens if the Fed tightens to address inflation but the underlying issues are still there ? I can't see how the Covid in Asia, the war, supply line problems, or worker shortages being resolved soon.
1) Does this make the Fed efforts ineffective ?
2) Does this make a recession more likely or cause the Fed to raise rates higher for inflation to fall ?

I'm curious what the body here thinks will come from this. How will the lingering problems affect the Fed's efforts and where this will leave the economy and inflation. I don't see the Fed backing off from fighting inflation after all the investment of influence and reputation. To pause and restart would not be a good response.

Where does this leave the economy and inflation ? This is purely a academic question to me. While economic conditions will affect investments I have no plan to change my investments but to stick to my AA and funds.

Thanks

 

[frayne]

My crystal ball is a bit hazy this morning but I would comment, the more things change, the more things stay the same. We've seen these circumstances before and the best plan is as before, have a diversified portfolio and don't panic, we will be just fine. That's my story and I'm sticking to it.

 

[njhowie]

I'm curious what the body here thinks will come from this. How will the lingering problems affect the Fed's efforts and where this will leave the economy and inflation. I don't see the Fed backing off from fighting inflation after all the investment of influence and reputation. To pause and restart would not be a good response.

Where does this leave the economy and inflation ? This is purely a academic question to me. While economic conditions will affect investments I have no plan to change my investments but to stick to my AA and funds.
Thanks

My guess is as good as anyone else's. With that said...

The Fed is caught between a rock and a hard place and something will have to give. I believe that when push comes to shove, the Fed will revert to its old ways under Powell - easing.

I do not believe that Fed will have to go very far to see signs of inflation coming down. Remember, inflation coming down does not mean prices go lower (overall), just that the rate of increase is slower. Most can see a recession coming. Who believes that we'll continue to see high inflation through a recession? If so, that makes the Fed's job that much more difficult. How can you get through a recession and continue raising interest rates? You may just push the entire economy into depression.

My belief has always been that in light of this, and that the folks at the Fed are well aware of it, they are going lift rates as quickly as they can get away with, because something is going to break and they will be forced to back off at that point.

 

[RetireBy90]

My guess is as good as anyone else's. With that said...

The Fed is caught between a rock and a hard place and something will have to give. I believe that when push comes to shove, the Fed will revert to its old ways under Powell - easing.

I do not believe that Fed will have to go very far to see signs of inflation coming down. Remember, inflation coming down does not mean prices go lower (overall), just that the rate of increase is slower. Most can see a recession coming. Who believes that we'll continue to see high inflation through a recession? If so, that makes the Fed's job that much more difficult. How can you get through a recession and continue raising interest rates? You may just push the entire economy into depression.

My belief has always been that in light of this, and that the folks at the Fed are well aware of it, they are going lift rates as quickly as they can get away with, because something is going to break and they will be forced to back off at that point.

I hadn't really considered raising rates in the midst of a recession. My concern is that raising rates to impact demand will work but that is only a part of the problem. I don't see the war ending soon, China and Covid and supply chain won't be fixed soon, while a recession will ease demand on workers we don't have any way to quickly add 10M new workers. More jobs overseas ?
This is an interesting problem we have created here.

 

[Rocky mtn high]

They are putting us in recession on purpose. Taking away the money they gave out. Real estate can’t keep going up with 5.50% mortgage rates and they have said they want to reduce investment values.

 

[W2R]

My crystal ball is a bit hazy this morning but I would comment, the more things change, the more things stay the same. We've seen these circumstances before and the best plan is as before, have a diversified portfolio and don't panic, we will be just fine. That's my story and I'm sticking to it.

+1000 Great answer to the question.

As Frank says to me each time the market slips further, "We live in interesting times." A recession may be inevitable but we have been there (2008), done that, got the t-shirt, and we are fine.

We plan to do nothing, which is what we did then. We'll watch and wait. Luckily we are in a position to do that, since we are retired with no mortgages or other debt, and we both have mini-pensions and Social Security. My portfolio is diversified and has an AA that I can live with. I don't plan to take anything out of it for a while, though; my SS will be sufficient for now.

This too shall pass, eventually. Meanwhile it's a great time to brush up on our LBYM skills in order to cope with the inflation we are experiencing, and enjoy retired life despite all that is going on!

 

[ncbill]

Last WSJ article I read said supply chain problems will slowly resolve, but the cost will be lower efficiency and higher prices.

Basically, businesses are moving back to stockpiling what they need instead of relying on a just-in-time inventory model so they don't have to shut down their production lines.

 

[SecondCor521]

So I've been thinking about the current economy and inflation.

Several problems have been involved to bring us to where we are today and where the economy will go from here. We have all the financial responses to Covid which have increased the money floating around (used to be M2); we have supply chain problems which include current closures in Asia; we have the war in Ukraine; we have a worker shortage; we have inflation and Fed raising rates and reducing it's bond holdings to fight inflation.
So what happens if the Fed tightens to address inflation but the underlying issues are still there ? I can't see how the Covid in Asia, the war, supply line problems, or worker shortages being resolved soon.
1) Does this make the Fed efforts ineffective ?
2) Does this make a recession more likely or cause the Fed to raise rates higher for inflation to fall ?

I'm curious what the body here thinks will come from this. How will the lingering problems affect the Fed's efforts and where this will leave the economy and inflation. I don't see the Fed backing off from fighting inflation after all the investment of influence and reputation. To pause and restart would not be a good response.

Where does this leave the economy and inflation ? This is purely a academic question to me. While economic conditions will affect investments I have no plan to change my investments but to stick to my AA and funds.

Thanks

I'm not an economist. I'm a relentless optimist. My 2.2 cents (<- heh, see what I did there?):

I think inflation is always a problem of too much money chasing too few goods and services. So I do have very high confidence that the Fed's actions with interest rates and QT will work to address inflation.

I think it's possible to likely that the Fed will tighten for too long (I think they've done this in recent history both on the tightening and loosening stages) and we'll enter a modest recession. Not the worst thing in the world, especially for me since I don't need a job and my house and car are paid off.

I hope that COVID fiscal stimulus is mostly over; if so it's effects on inflation will dissipate over time.

Fed officials have said that they are monitoring supply chain issues and the war in Ukraine and taking the effect of those two things into consideration when setting their policy.

The worker shortage puzzles me and continues to puzzle me. I'm retired and don't need the money and *I'm* tempted by these entry level jobs paying $14 to $17 an hour around here, so it would seem that a younger person who has bills to pay and stuff to buy would even be more motivated to take those jobs.

I guess with unemployment down around 3.5% (I think 3.6% was the latest number?) perhaps we are getting close to or past full employment. I was taught that there was always a small percentage of people who are considered unemployed at any given time when they're really just in transition - either they're switching to a new job, or not really looking, or something.

But the Fed's dual mandate is for full employment and stable low inflation, so logically as long as we have full employment and high inflation, they're going to raise rates. I guess if we enter a recession and unemployment increases then they'll have to shift stances.

 

[HarryHawk]

I personally think the world runs on energy and as energy prices continue to rise, the cost for everything else will follow. Releasing oil from the U.S. Strategic Petroleum Reserve has done nothing but dig the hole a bit deeper since hopefully someday it will be replaced in case we ever REALLY need it.

Green energy sounds great, so do flying cars. Unfortunately the technology is not currently available to currently be practical. Buying energy from our enemies emboldens and enables them.

Too bad there is not another solution.

 

[daylatedollarshort]

My guess is that a recession will happen and, especially in California, there will be a housing bust. To fight 8.5% inflation, historically interest rates would have to go pretty high. So I think housing prices, bond prices and stocks have a long way yet to fall. I am looking forward to bond yields and real interest rates going up. I've already mentally built in and braced for a 50% loss on our stocks. We only own individual bonds now we will hold to maturity so those aren't really impacted by a drop in day to day prices since they will be held to maturity.

In the meantime, I try to continue to lower our overhead and personal inflation rate and optimize the portfolio. Some of our planned projects for this year include moving the HSA account to where we can get a higher yield, getting the Am Ex card with 6% back on groceries, researching getting a heat pump, playing the credit card reward points games again, getting rid of the lawn and a bunch more. If there is a recession I'm going to use that time to do all our house upgrades when there is less price competition for contractor work.

 

[marko]

So I've been thinking about the current economy and inflation.

Several problems have been involved to bring us to where we are today and where the economy will go from here. We have all the financial responses to Covid which have increased the money floating around (used to be M2); we have supply chain problems which include current closures in Asia; we have the war in Ukraine; we have a worker shortage; we have inflation and Fed raising rates and reducing it's bond holdings to fight inflation.
So what happens if the Fed tightens to address inflation but the underlying issues are still there ? I can't see how the Covid in Asia, the war, supply line problems, or worker shortages being resolved soon.

For a moment I thought we were talking about the gloomy late 1970's. SSDD IMO, YMMV (LMNOP)

Seriously though, we seem to go through these critical periods where nothing seems to be working.

I believe that there is an "equilibrium" of sorts (financial, social, environmental) that sometimes just gets out of whack before the gravitational forces bring things back into line. Even the Dow has a short term overshoot/undershoot property to it but when viewed from a distance is a fairly straight line.

We've been hit with a couple good shots over the past few years, but I do think in times like these all we can do is close the hatch and ride the storm out. The sun will return.

 

[Dash man]

When I worry about inflation and the economy too much, I just have to start thinking about my grandkids and my mood improves immediately.
I’m not planning to make any serious changes to my asset allocation. What happens, happens. I believe we’re well set and trying to ensure the kids will be too.

 

[Dash man]

Here’s a good 4-minute video explaining why the economy is still going strong.

https://youtu.be/L_8OpVQQphs

 

[milford]

With all the head winds you mentioned I believe the Feds will have a hard time reigning in inflation without being aggressive so I wouldn't count out the Fed's making another pivot later in the year of additional rate hike or increasing to .75. Q2 inflation numbers will continue to rise (gasoline price increase, continued supply chain crunch, china shutdowns) and I believe if the Feds can't reign in inflation to a reasonable number by the end of the year they would lose all credibility.

 

[ownyourfuture]

It probably won't be popular, but here's my 2 cents. My concern. (not for me, but for future generations)

If debt compounds at the same rate over the next 41 years, it would stand @ around 900 trillion by 2064.
Hopefully MMT (modern monetary theory) turns out to be accurate.

KEY TAKEAWAYS
Modern Monetary Theory (MMT) challenges conventional beliefs about how the government interacts with the economy, the nature of money, the use of taxes, and the significance of budget deficits.

These beliefs, critics say, are a hangover from the gold standard era and are no longer accurate, useful, or necessary.

MMT is used in policy debates to argue for such progressive legislation as universal healthcare and other public programs for which governments claim to not have enough money to fund.

Put simply, such governments do not rely on taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency. Since their budgets aren’t like a regular household’s, their policies should not be shaped by fears of a rising national debt.

https://www.investopedia.com/modern-monetary-theory-mmt-4588060

Personally, I'd apply an old adage.
“if it sounds too good to be true, it probably is”

 

[cyber888]

The economy is very strong. Consumer demand is strong. Inflation would have tapered off sooner - but we got the Ukraine-Russian war that pop out of no where and that's not in anyone's economic model .. It is causing Global inflation, oil shortage, supply chain problems. We've got Sanctions and geo-political maneuvering. It's going to resolve at some point.

 

[Sunset]

I personally think the world runs on energy and as energy prices continue to rise, the cost for everything else will follow. Releasing oil from the U.S. Strategic Petroleum Reserve has done nothing but dig the hole a bit deeper since hopefully someday it will be replaced in case we ever REALLY need it.

Green energy sounds great, so do flying cars. Unfortunately the technology is not currently available to currently be practical. Buying energy from our enemies emboldens and enables them.

Too bad there is not another solution.

Actually releasing some oil from the U.S. Strategic Petroleum Reserve does put downward pressure on the price of gas and oil meaning less inflation.

There is lots there, and it will be replaced in a year or two or three when prices are LOWER again... So it's like buy low and sell high.

Totally agree buying oil from others makes us dependent upon them, just like having China manufacture everything or lots of parts of our stuff makes us dependent upon them. ..
Could we make a fighter jet if China stopped exporting to us

 

[marko]

Just about everything we do and buy has a petroleum connection and cost associated with it.

IMO, We need cheaper oil more than more expensive loans in order to bring down the cost of goods and services.

The Fed is helping but addressing the oil shortage would do a lot more, faster.

 

[RetireBy90]

Just heard Judy Shelton, former Fed nominee, stating the real problem with inflation is too much money for the goods available. She raised possibility of govt handing out more money which increases supply without offsetting increase in production thus more inflation. Interesting to think about our current economy in these terms. Fed can't do much if govt increases money supply.

 

[Car-Guy]

I can't claim (although I have a layman's opinion) that I really understand how all of this works but when I think about what "fiat money is" along with runaway government spending, to name a few things, it scares the bejeebers out of me. The ultimate house of cards IMO. I've listened to Jay Powell pretty close for the past few years and I have very little confidence that he and his team really understand it either.

 

[aja8888]

Some thoughts to consider:

1. The FED policy moves are reactionary and since the Volcker years, have not been aggressive in addressing inflation.

2. When inflation reared its ugly head over a year ago, the FED insisted it was "transitory" and they would "let inflation run hot" for the time being. Thses statements by Powell have been published thousands of times in the media.

3. 400 PhD economists at the FED were wrong came to that conclusion (see 2. above).

4. Inflation was well underway before the Ukraine invasion.

5. Releasing crude oil out of the SPR is a political event as that oil takes months to get sold and into the "system". Actually, some of that oil was sold to foreign interests.

6. On a inflation adjusted price, our fuel products in the U.S. are not out of line.

7. With a few exceptions, the U.S. currently has fairly low fuel costs verses the rest of the world.

8. The FED's actions are meant to keep inflation going as long as it can to reduce the balance sheet debt (roughly $6 Trillion) and minimize the chance of the Democrats losing power in November's elections.

9. Who is currently getting the shaft with this high inflation are families on fixed incomes and small businesses who have no pricing power.

10. Keep your head down and keep thinning the cabbage (said to me in 1981 by a Japanese friend who's U.S. family was interned during WWII).

11. The short covering rally yesterday is over.....

12. None of the above is about you on a personal basis.

 

[Freedom56]

The Fed can raise rates only so much given the level of national debt, corporate debt, and consumer debt that has to roll over. This isn't the early 80's. Equities are still overpriced and the stock market became one large casino in part due to the easy monetary policy. We still have stocks like GME (Gamestop) trading at over $100 and yet they continue to lose money. Just like the 2000 bubble took a few years to unravel, so will this one. Don't be surprised if we see a complete crash in the equity markets.

 

[aja8888]

The Fed can raise rates only so much given the level of national debt, corporate debt, and consumer debt that has to roll over. This isn't the early 80's. Equities are still overpriced and the stock market became one large casino in part due to the easy monetary policy. We still have stocks like GME (Gamestop) trading at over $100 and yet they continue to lose money. Just like the 2000 bubble took a few years to unravel, so will this one. Don't be surprised if we see a complete crash in the equity markets.

Yep, the FED has boxed themselves (and us) in a corner since 2009 when they started QE and enriched the top 0.01% by printing ton of greenbacks. Asset deflation is a bitch when your houses and land have appreciated 10 times over.

If anyone reviews the FED's "plan" of rolling off $90 - $100 billion of bonds and MBS's per month, you will see that it will be 4 years before the QT is over. Good luck with that.

 

[daylatedollarshort]

I have read that historically interest rates needed to go above the inflation rates in order to reduce inflation. With the one year Treasury at 2% and last inflation figures at 8.5%, that is a -6.5% real interest rate on the 1 year Treasuries. Based on that, I have been thinking it is quite possible we haven't seen anything yet on how high the Fed will eventually need to raise rates to get inflation under control.

 

[Freedom56]

Yep, the FED has boxed themselves (and us) in a corner since 2009 when they started QE and enriched the top 0.01% by printing ton of greenbacks. Asset deflation is a bitch when your houses and land have appreciated 10 times over.

If anyone reviews the FED's "plan" of rolling off $90 - $100 billion of bonds and MBS's per month, you will see that it will be 4 years before the QT is over. Good luck with that.

None of us can control the FED. All we can do is react to the markets response to their actions/inactions. I see it as a repeating pattern of these rate hike hick-ups. If rates were really moving much higher the 30 year bond would be at 5% now. A lot of this inflation is due to corporate gouging. With so much easy money in circulation and high demand, why not raise prices? Goods and services are priced in accordance with what the market will bear. This is economics 101. However, at some point people just hold back on spending and prices collapse. We are seeing that in the semi-conductor sector and in particular graphics hardware. People have been cutting back on prescription drugs and healthcare due to ever rising costs far in excess of the rate of inflation.