Fed Now Says It Should Have Acted Sooner on Inflation

[Montecfo]

Exactly. I never believed it was transitory.

And this belief was based on what exactly?

Curious....

 

[MichaelB]

It is entirely possible the inflation we’re experiencing is transitory. That is to say, it is not chronic, where increases in prices and labor feed into each other and create a continuing loop with upward slope and is increasingly difficult to break. Transitory to a policy maker means something different than to us ordinary folk. The challenge is not ending inflation, it’s getting it down without causing a recession.

It’s also not clear the Fed has committed a major policy error. The counterfactual situation, where there was insufficient fiscal and monetary stimulus, might have been worse. That is, the consequences, in terms of unemployment, economic activity, asset prices, might have caused greater damage.

Over the next couple of years prices will adjust and most employed people will come out even. Middle class homeowners will see their homes appreciate in value while the fixed rate mortgage stays low. Holders of fixed rate fixed income, on the other hand, will feel permanent unrecoverable loss in purchasing power.

 

[luckydude]

It is entirely possible the inflation we’re experiencing is transitory. That is to say, it is not chronic, where increases in prices and labor feed into each other and create a continuing loop with upward slope and is increasingly difficult to break. Transitory to a policy maker means something different than to us ordinary folk. The challenge is not ending inflation, it’s getting it down without causing a recession.

It’s also not clear the Fed has committed a major policy error. The counterfactual situation, where there was insufficient fiscal and monetary stimulus, might have been worse. That is, the consequences, in terms of unemployment, economic activity, asset prices, might have caused greater damage.

Over the next couple of years prices will adjust and most employed people will come out even. Middle class homeowners will see their homes appreciate in value while the fixed rate mortgage stays low. Holders of fixed rate fixed income, on the other hand, will feel permanent unrecoverable loss in purchasing power.

This is the year-over-year inflation rate for the last 11 months (updated to include Feb):

Feb 1, 2022 7.9%
Jan 1, 2022 7.48%
Dec 1, 2021 7.04%
Nov 1, 2021 6.81%
Oct 1, 2021 6.22%
Sep 1, 2021 5.39%
Aug 1, 2021 5.25%
Jul 1, 2021 5.37%
Jun 1, 2021 5.39%
May 1, 2021 4.99%
Apr 1, 2021 4.16%

It's hard to see how inflation can still be regarded as "transitory" given that it's been going up month by month for 11 months in a row. Even the Fed has acknowledged that it should have acted earlier to counter inflation.

Despite the Fed's statement, I don't think the Fed is at all serious about fighting inflation. There's no sense of urgency. If they are truly concerned about inflation, they would be doing rate hikes right now instead of waiting until the next meeting.

Poster gcgang up post has a good analogy about the house being on fire. The Fed is the fire captain on scene doing a press conference announcing that they should have been here earlier to fight the house fire, but still takes no action to put the fire out while the house burns behind them. Instead, they are going to wait another week before pouring a glass of water on the fire as the fire continues to spread and burn. There is simply no sense of urgency.

 

[Badger]

With inflation rising whose crystal ball can tell us when the CD rates will go up like 1984? I have some dry powder.



Cheers!

 

[copyright1997reloaded]

It is entirely possible the inflation we’re experiencing is transitory. That is to say, it is not chronic, where increases in prices and labor feed into each other and create a continuing loop with upward slope and is increasingly difficult to break. Transitory to a policy maker means something different than to us ordinary folk. The challenge is not ending inflation, it’s getting it down without causing a recession.

It’s also not clear the Fed has committed a major policy error. The counterfactual situation, where there was insufficient fiscal and monetary stimulus, might have been worse. That is, the consequences, in terms of unemployment, economic activity, asset prices, might have caused greater damage.

Over the next couple of years prices will adjust and most employed people will come out even. Middle class homeowners will see their homes appreciate in value while the fixed rate mortgage stays low. Holders of fixed rate fixed income, on the other hand, will feel permanent unrecoverable loss in purchasing power.

The hyper-inflation of the 20's Germany was transitory. On a less Godwin's law example, here is a chart of US Inflation of the late 60's/70's/early 80's:

If we are following a similar path, we have a lot of pain ahead. One thing that stood out to me of that time was the abandonment of the US $ convertibility to Gold (as outlined in the Bretton Woods framework). I believe we have a real risk now of a movement away from the $ as the reserve currency. IF that happens, watch out below. For example: India was an abstain on the recent UN vote against the Russian Ukraine invasion. What happens if India sets up a bilateral agreement with Russia regarding settlement of trade not using US $?

(Or should I say watch out above, because the effect would be a significant reduction in the buying power of the dollar.) Of course many other fiat currencies are also suspect, so who knows their relative strength.

But who am I? Nobody. I'm just a player in this game that affects us all, trying to figure out my way of doing the best I can do to see and plan for what's coming down the road.

All I know is that the situation is getting worse, not better:
* The world is being split into us and them, and reduced trade (resulting in lowered standards of living overall)
* There is a lack of understanding of basic economics in terms of supply and demand. Already there are calls for price controls because of "unfair profits".

I would not be surprised to see price controls and perhaps even food rationing within a year.

 

[copyright1997reloaded]

With inflation rising whose crystal ball can tell us when the CD rates will go up like 1984? I have some dry powder.



Cheers!

We are NO WHERE near having good CD deals, especially with any sort of longer-term duration.

The last time we had a 7%+ inflation print, 10 year treasuries were yielding over 14%. Right now, we have negative (inflation-adjusted) real yields.

 

[MichaelB]

The hyper-inflation of the 20's Germany was transitory.

Not transitory. The currency collapsed and was replaced. Hyperinflation cannot be transitory.

On a less Godwin's law example, here is a chart of US Inflation of the late 60's/70's/early 80's:

If we are following a similar path, we have a lot of pain ahead.

The same could be said about the early 1900’s and years leading up to the great depression. There’s no data to suggest either outcome is likely.

One thing that stood out to me of that time was the abandonment of the US $ convertibility to Gold (as outlined in the Bretton Woods framework). I believe we have a real risk now of a movement away from the $ as the reserve currency. IF that happens, watch out below. For example: India was an abstain on the recent UN vote against the Russian Ukraine invasion. What happens if India sets up a bilateral agreement with Russia regarding settlement of trade not using US $?

(Or should I say watch out above, because the effect would be a significant reduction in the buying power of the dollar.) Of course many other fiat currencies are also suspect, so who knows their relative strength.

The US$ no longer being the global reserve currency would be a net positive for the US. It’s not going to happen anytime soon, however, because there isn’t a viable alternative. This is definitely a role no other country wants.

What happens if India and Russia trade? Not much. Sanctions don’t prevent it from happening, they are more carefully directed at financial transactions. India just needs to find a way to pay without violating the sanctions.

All I know is that the situation is getting worse, not better:
* The world is being split into us and them, and reduced trade (resulting in lowered standards of living overall)
* There is a lack of understanding of basic economics in terms of supply and demand. Already there are calls for price controls because of "unfair profits".

I would not be surprised to see price controls and perhaps even food rationing within a year.

If by situation you mean inflation in the US, it is not getting worse. There may be a short lived impact to trade because of the Russian invasion, but the greater effect to global trade can be contained, as Russia will continue to export.

As for price controls and food rationing, that is quite unlikely, and I’ll take that wager and even give odds.

 

[corn18]

We are NO WHERE near having good CD deals, especially with any sort of longer-term duration.

The last time we had a 7%+ inflation print, 10 year treasuries were yielding over 14%. Right now, we have negative (inflation-adjusted) real yields.

 

[Turbo29]

The US$ no longer being the global reserve currency would be a net positive for the US. It’s not going to happen anytime soon, however, because there isn’t a viable alternative. This is definitely a role no other country wants.

This author seems to agree with you: An Exorbitant Burden

 

[Dtail]

We are NO WHERE near having good CD deals, especially with any sort of longer-term duration.

The last time we had a 7%+ inflation print, 10 year treasuries were yielding over 14%. Right now, we have negative (inflation-adjusted) real yields.

Yup will not happen with all the debt out there.

 

[Markola]

This author seems to agree with you: An Exorbitant Burden

That’s an interesting article, and challenging to my assumptions.

“The world accumulates dollars, in other words, for one very simple reason. Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits. But that badge of honor comes at a real cost to the long-term growth of the domestic economy and its ability to manage debt levels.”

 

[copyright1997reloaded]

As for price controls and food rationing, that is quite unlikely, and I’ll take that wager and even give odds.

The last thing I need to worry about is a wager with someone on the Internet. I've got real wagers in terms of $ allocated and how I am living my life.

You do you, no need to try to bolster your opinion by saying you will bet on it.

I am very well aware of what happened in Germany and how its hyperinflation progressed. My point was that it didn't start out as hyper-inflation, and ALL inflation ends up "transitory" one way or the other. That is, either because it is brought under control or the currency fails.

I am not here to try to convince anyone of anything. I've given up on that long ago.

 

[MichaelB]

This author seems to agree with you: An Exorbitant Burden

Very good link, thanks. Michael Pettis is an expert on trade and capital flows, also China. It’s no exaggeration to say he is one of the most knowledgeable economists in the world on these topics, especially trade and China.

 

[ExFlyBoy5]

Very good link, thanks. Michael Pettis is an expert on trade and capital flows, also China. It’s no exaggeration to say he is one of the most knowledgeable economists in the world on these topics, especially trade and China.

Ah, China. Well seeing how they seem to be shutting down many of the large manufacturing centers now because of a COVID outbreak, I don't see any of the supply/inflation issues going away anytime soon.

https://www.cnbc.com/2022/03/14/chi...en-orders-production-halts-control-covid.html

 

[MichaelB]

Ah, China. Well seeing how they seem to be shutting down many of the large manufacturing centers now because of a COVID outbreak, I don't see any of the supply/inflation issues going away anytime soon.

https://www.cnbc.com/2022/03/14/chi...en-orders-production-halts-control-covid.html

Yes, that is a real risk.

 

[corn18]

IMHO, there is a recession coming. Keep an eye on unemployment. When that starts to rise, a recession is imminent. When it breaks 6%, we will be in it.

 

[all4j]

IMHO, there is a recession coming.

It may be of interest to you to look at some current data from the market, specifically interest rate futures. NY fed analysis of current data assigns a low probability of a recession by end of 2022. Meaning market is starting to price a recession in sooner rather than later. Also, market is starting to indicate expectations of interest rate cuts -- yes, before the 1st hike -- in mid 2023; meaning a recession is expected that would necessitate cuts instead of hikes. Of course, this doesn't mean end of inflation necessarily.

A few other scattered thoughts...part of difficulty in these discussions is a difference in background. Earlier poster mentioned what was taught in econ 101. Catch is that has changed over time. Took me a while to begin to realize some have been indoctrinated in theories that haven't been time tested. Explains why some in denial about current situation.

Also, be careful in trying to isolate this down to one variable. For example, those that mention Volcker. Often is overlooked that a key part of what happened then were changes in Congress. Outside a class room, there are affects of both monetary & fiscal decisions. Not to mention policy changes by administration, & on & on

 

[corn18]

You can have a bear market and no recession. You can have a bull market in a recession. The market is not the economy, but it can impact it. Unemployment is the best indicator of being in a recession without knowing it.

 

[Koolau]

A lot of Monday morning quarterbacking in this thread.

You state the obvious. That's our job and we're good at it here on FIRE Community! The Big Boys really don't let us play in the big game, so what else can we do?

By the way, as others have mentioned, many of us have been predicting this for a long time. Only thing I got wrong was I never guessed inflation would wait this long. Of course, I never went to Harvard or Yale so what can you expect when YMMV?

 

[copyright1997reloaded]

You state the obvious. That's our job and we're good at it here on FIRE Community! The Big Boys really don't let us play in the big game, so what else can we do?

By the way, as others have mentioned, many of us have been predicting this for a long time. Only thing I got wrong was I never guessed inflation would wait this long. Of course, I never went to Harvard or Yale so what can you expect when YMMV?

No Harvard or Yale for me either. Too poor and from a background where I didn't know that Ivory League schools were somehow important.

However I did manage to squeak by and get an Economics degree, manga cum laude along with a Computer Science degree and a minor in Math, in three years from a top-25 public institution.

Still dumb however in that I wasn't savvy enough to go work in the financial district, instead went to work for a mega-corp doing software development. it was only after 2/3's of my career with mega-corp that I figured out that having both of these backgrounds was a good combo in terms of Wall Street. So, a bit slow on the uptake.

For all of us, now what is the question.
* We are seeing inflation rage, tomorrow morning we will likely see a +10% producer price print...and that is with the latest BAD CPI not including any of the impact of the Russian invasion.
* There is likely real-time demand destruction going on, as people see their grocery bills skyrocket and more importantly fuel/heating bills rocket.
* I would not be surprised to see us in a recession by 3Q
* As I hypothesized before, the Fed will stop interest rate raises at the signs of an economy going into recession.
* I have no idea of predicting what this means in terms of stock prices. I've been lightening up (net selling) since late 2021, but I always do thing in baby steps (which is not always a good idea). Obviously, I wish I had sold more a few months ago!

 

[luckydude]

Ah, China. Well seeing how they seem to be shutting down many of the large manufacturing centers now because of a COVID outbreak, I don't see any of the supply/inflation issues going away anytime soon.

https://www.cnbc.com/2022/03/14/chi...en-orders-production-halts-control-covid.html

As long as China continues to adhere to a zero tolerance policy regarding Covid, the pandemic will never really end for them and the supply chain problems will never go away. They need to figure out a way to transition from zero tolerance to living with the virus like other countries such as OZ and NZ are doing.

 

[daylatedollarshort]

As long as China continues to adhere to a zero tolerance policy regarding Covid, the pandemic will never really end for them and the supply chain problems will never go away. They need to figure out a way to transition from zero tolerance to living with the virus like other countries such as OZ and NZ are doing.

Besides the zero tolerance issue, which hinders natural immunity from building up, the Chinese vaccine hasn't proved as effective against Omicron and its subvariant as the vaccines used in OZ and NZ, so as the song goes, they are kind of right back to where they started from.

 

[luckydude]

Besides the zero tolerance issue, which hinders natural immunity from building up, the Chinese vaccine hasn't proved as effective against Omicron and its subvariant as the vaccines used in OZ and NZ, so as the song goes, they are kind of right back to where they started from.

Yes. Western studies seem to indicate that Chinese vaccines are only 50-60% effective, so if they really "let it rip," their infection rate will skyrocket, compounded by their large population.

The question facing the Chinese government is whether they are willing to endure this short-term pain to "get over the hump," and so far they haven't shown any willingness to do this. By sticking to zero tolerance and keeping infection rates low up to now, the Chinese government has held itself up as a model for the rest of the world on how to deal with Covid, while also using their success in Covid containment to enhance the regime's legitimacy with the Chinese populace. So changing gears now would have political costs, especially on the domestic front.

Across the strait, even the stubborn Taiwan government is now (albeit slowly) retreating from its long-held zero tolerance policy and laying out a roadmap to move to "living with the virus".

All this is to say that the supply chain problems for Chinese goods won't be going away anytime soon.

 

[daylatedollarshort]

An adjunct professor of economics at George Washington University and former chief economist at the U.S. Department of Labor had this to say on inflation in a recent article "We have never got inflation out of the economy by having a federal funds rate that's lower than the inflation rate," Furchtgott-Roth says. "We've only got inflation out of the economy by having a federal funds rate that's higher than the inflation rate."
The Fed tackles inflation: Three possible scenarios for mortgage rates (msn.com)

Looks like we could see a pretty steep rise in interest rates if the initial round of increases do not slow down the current inflation rate.

 

[corn18]

The yield curve is now inverted. 5 year yield is higher than 30 year yield. Not sure what it means but I have been conditioned to be concerned about that.