Fed Now Says It Should Have Acted Sooner on Inflation

[Turbo29]

Following Fed for over 40 years now, I've come to realize they're just another political arm. Big shots coming in from Wall Street or Yale or Harvard to run it, appointed by both sides over the years, and not ONE understands true economics, goods and services, supply and demand. Hideous.

What makes you think they don't know? What makes you think that what they claim to be trying to accomplish is actually their real goal?

 

[daylatedollarshort]

Real interest rates have been all over the map in the U.S. but historically have usually not been negative like they are now and now they aren't just a little negative. CPI inflation is at 7.9% and a one year Treasury is at 1.15%.

Since 2004 TIPS returns have been 2 - 3% over inflation. To get inflation under control, real interest rates will probably need to go to 2 - 3% over inflation, which would be 10 - 11% nominal rates. I don't know what the Fed has been smoking to keep rates so low for so long now but we're seeing the results at the gas station and grocery store. I tend to agree they really don't have a clue and now we're going to have to have some big interest rate increases and likely a recession to keep inflation from spiraling out of control. My house went up $100K in the last couple of weeks. I don't really see this high inflation ending by anything other than much increased nominal interest rates, a housing bust and a recession. I mean what else has ever worked in the past? Isn't this the standard playbook to end high inflation?

 

[jimbee]

So, if the Keepers of the Discipline (Harvard/Yale types) and the Practitioners of the Discipline (Wall Streeters) don't know anything about true economics etc etc, who on earth would?

Evidently, they should be checking with this forum.

 

[Koolau]

So, if the Keepers of the Discipline (Harvard/Yale types) and the Practitioners of the Discipline (Wall Streeters) don't know anything about true economics etc etc, who on earth would?

Well, I do understand basic economics. And I didn't go to Harvard or Yale (Heck, I haven't even visited.)

I learned economics in Freshman econ class. If you pump trillions into the economy, you eventually get inflation. It's complicated by lots of other stuff (physical policy, taxation policy, wars, pandemics, etc. etc.) BUT you can't fool mother nature for ever. Sooner or later inflation happens when you pump money into the economy. (Econ 101)

So, I agree that the "experts" DO know all this stuff. If I can learn it as a freshman, they must surly have learned it in graduate programs at these prestigious schools. I just don't like to hear them come back and say they are shocked, SHOCKED that inflation has reared its ugly rear. Big surprise! Only surprise to me is that it didn't happen sooner but YMMV.

 

[daylatedollarshort]

Well, I do understand basic economics. And I didn't go to Harvard or Yale (Heck, I haven't even visited.)

I learned economics in Freshman econ class. If you pump trillions into the economy, you eventually get inflation. It's complicated by lots of other stuff (physical policy, taxation policy, wars, pandemics, etc. etc.) BUT you can't fool mother nature for ever. Sooner or later inflation happens when you pump money into the economy. (Econ 101)

So, I agree that the "experts" DO know all this stuff. If I can learn it as a freshman, they must surly have learned it in graduate programs at these prestigious schools. I just don't like to hear them come back and say they are shocked, SHOCKED that inflation has reared its ugly rear. Big surprise! Only surprise to me is that it didn't happen sooner but YMMV.

These same experts said that high inflation was transitory last year and that was the wrong call.

“The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake,” the former Pimco CEO and current Queens’ College president said Sunday on CBS’ “Face the Nation.”..“So, the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility,” he added. “Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.” - https://www.cnbc.com/2021/12/13/el-...inflation-call-in-the-history-of-the-fed.html

That article with the advice to act quickly was from December.

 

[teetee]

I am not sure if Fed is able to make sound decision to help mitigating the inflation from the start.

After the last recession in 2009, they went into over protective mode and kept the rate low in very unnecessary manner in the name of economy growth.

What could have been a steady growth became a decade of glory that make people spoiled rotten financially. Yeah nobody would complain why we see 20+% yr-to-yr market growth but we also know it is over valued and inflated.

The inflation and the bear market now and likely the recession that follows are just we suffering from our mistakes in the past decade. And we will likely not learn from this experience either.

 

[pb4uski]

A lot of Monday morning quarterbacking in this thread.

 

[Markola]

I would rather have all this bellyaching about a possible future recession than had the Fed and Congress not acted in March 2020. It’s easy to forget how unemployment was spiking like we’ve never seen before, and our portfolios were in free fall. Maybe they overreacted some but that was learning the hard way from 2009’s under-reacting.

 

[copyright1997reloaded]

A lot of Monday morning quarterbacking in this thread.

What are you talking about? Just because you believe it is "Monday morning quarterbacking" doesn't make it so. Some of us have been warning about this, even here on ER for quite a while now.

 

[daylatedollarshort]

I am not sure if Fed is able to make sound decision to help mitigating the inflation from the start.

After the last recession in 2009, they went into over protective mode and kept the rate low in very unnecessary manner in the name of economy growth.

What could have been a steady growth became a decade of glory that make people spoiled rotten financially. Yeah nobody would complain why we see 20+% yr-to-yr market growth but we also know it is over valued and inflated.

The inflation and the bear market now and likely the recession that follows are just we suffering from our mistakes in the past decade. And we will likely not learn from this experience either.

Part of the inflation now is due to labor shortages. Some from Covid, but a lot from early retirees who benefited from stock market gains. It is likely going to take a down market and a recession to bring some of those retirees back into the work force.

"The Fed wrote that it’s likely many who retired because of Covid-19 would return to work, and now given the improved job market, there’s even more reason to go back to work.The Federal Reserve is letting the economy run especially hot in an attempt to bring back people into the workforce, Oxford Economics' senior economist Bob Schwartz wrote in a note to clients. But that hot economy and resulting hot market mean bigger 401(k) balances – so some workers may not feel as compelled to continue working when they check their inflated retirement accounts....The big question, then, is whether these two factors balance each other out. Oxford Economics says no.

“One likely reason is that ageing baby boomers are entering their golden years with considerably stronger balance sheets than they expected, thanks to surging asset prices and lower debt burdens,” Schwartz wrote, noting that household wealth increased 23% ($25.6 trillion) over the past year thanks to rising home values and ever-higher stock market." -'Fat' 401(k)s causing people to retire early: Oxford Economics (yahoo.com)

To paraphrase Dr. Phil, Hey Fed, how's that theory been working out for you?

 

[gcgang]

Fed interest rate increases of 1/4 - 1/2% to quell inflation is like pouring a glass of water on a house fire.

 

[copyright1997reloaded]

I would rather have all this bellyaching about a possible future recession than had the Fed and Congress not acted in March 2020. It’s easy to forget how unemployment was spiking like we’ve never seen before, and our portfolios were in free fall. Maybe they overreacted some but that was learning the hard way from 2009’s under-reacting.

You've essentially supported my long time argument: Namely that the original mandate, then the dual mandate of "stable prices" is a farce. We are now running massively negative real rates and there is no way the Fed can stand the political pressure and put out the inflation fire. We have no Volker to come to the rescue. The only way the fire doesn't continue to rage is that some event (which might have just happened in eastern Europe) causes a large destruction in demand (i.e. demand destruction), which alleviates the inflationary pressures. (I am not betting on this outcome, just stating it as a possibility).

A long time ago I read somewhere (can't remember where, maybe it was even here) about the "Ka-Boom" theory. I think it was way back in 2008/09? That is, some event occurs, there is a "Ka" portion where there is a steep contraction and is deflationary in nature, even with fiscal or monetary stimulus. Eventually, that ends and we enter the "Boom" portion, where all of that stimulus finally results in inflationary pressures. I believe we are in the "You are here" aspect of that.

In the spirt of openness, I am long precious metals to the tune of a couple years of living expenses, long inflation adjusted tips to the tune of a couple years of living expenses, long copper, oil/gas/other again for a year or so of budget. With all of that, I feel I am not nearly long enough overall in these areas.

 

[copyright1997reloaded]

I would say they are not the same. Owning financial instruments investing in, say gold, is very different from possessing the physical gold and being able to transport/dispose of it as you please. The former is purely an investment diversification/hedge. The latter is both an investment diversification/hedge as well as a useful store of value in a SHTF type calamity (along with food, guns, ammos, etc.).

Just noticed this morning (browsing) that US Silver Eagles are around $40 per ounce, while spot silver is $26. So the spread has been widening. I also check SdBullion just to get an idea of what they are bidding for various coins. $6 over spot for Sliver Eagles. Here's an old chart showing US Silver Eagle premium over spot: https://r36sqj-v2szh1yngs3x.cloudmaestro.com/Ee2ltSfhf/media/wysiwyg/blog2/700x530aWhy_are_Silver_Eagle_Coins_so_expensive_SD_Bullion.png.pagespeed.ic.AIN-zrPZ7h.webp

 

[Turbo29]

So, I agree that the "experts" DO know all this stuff. If I can learn it as a freshman, they must surly have learned it in graduate programs at these prestigious schools. I just don't like to hear them come back and say they are shocked, SHOCKED that inflation has reared its ugly rear.

It's obligatory to post this here:

 

[Markola]

^^^^ I agree that the Fed is in a damned if they do/damned if they don’t pickle. The political pressures on them are very real. If they don’t raise rates, inflation. If they do raise rates, scalding when growth slows due to war in Europe or the next Covid variant.

You’ve explained your inflation-resistant portfolio strategy, but what do you think the Fed and Congress should do or not do? “Change the Fed’s mandate” doesn’t strike me as a viable answer.

 

[GenXguy]

These same experts said that high inflation was transitory last year and that was the wrong call.

“The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake,” the former Pimco CEO and current Queens’ College president said Sunday on CBS’ “Face the Nation.”..“So, the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility,” he added. “Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.” - https://www.cnbc.com/2021/12/13/el-...inflation-call-in-the-history-of-the-fed.html

That article with the advice to act quickly was from December.

Exactly. I never believed it was transitory.

 

[Turbo29]

Exactly. I never believed it was transitory.

Neither did Jerome Powell, regardless of what he said.

 

[corn18]

The Fed will fix this eventually, but it will cause a recession. Unless this time it's different...

 

[yakers]

Recession, time to buy!

 

[Mulligan]

Yes, you’re right that our debt and deficit are due to Congress’ choices. The Fed does not contribute to debt, though its huge debt holdings through quantitative easing are a newer phenomenon. They say they can manage QE holdings down, though.

They will manage like they did in 2008-09 crisis. Monetizing most of it. I need to figure out if there is a way to monetize my debt, ha.

 

[corn18]

QE holdings will naturally go down as the bonds they bought come to term. But that will take a while.

 

[38Chevy454]

Trying to wrap my head around this:
I know the Fed needs to raise interest to slow inflation that is currently running near 8% officially and higher practically; which was caused a lot by all the excess govt spending/handouts from QE and Covid . But with the huge ballooning govt debt, it seems that even small increase in rates will cause debt to be larger portion of the US budget. So there is significant pressure on the Fed to keep rates low and let inflation be the answer to govt debt. Am I missing something or oversimplifying it?

 

[corn18]

Trying to wrap my head around this:
I know the Fed needs to raise interest to slow inflation that is currently running near 8% officially and higher practically; which was caused a lot by all the excess govt spending/handouts from QE and Covid . But with the huge ballooning govt debt, it seems that even small increase in rates will cause debt to be larger portion of the US budget. So there is significant pressure on the Fed to keep rates low and let inflation be the answer to govt debt. Am I missing something or oversimplifying it?

Nope, that's exactly what they did during and after WWII. Inflation drove up wages, increased tax revenues and helped pay off the debt.


That didn't work during the mid 70's to early 80's.

 

[flyingaway]

I remembered that the Fed reduced the interest rate before their regular meetings when the virus hit in early 2000. I am surprised that they did not raise the interest rate NOW or before when the inflation is running hot.

 

[milford]

Neither did Jerome Powell, regardless of what he said.

+1... like many said it doesn't take a rocket scientist to deduce that having record low interest rates, printing money like there is no tomorrow, and giving out stimulus and SBA "loans" like giving out candy on Halloween will lead to massive inflation.

The Feds only cared about preventing a recession back then and it worked. Also their strategy is to kick the can down the road as far as possible (someone else's problem, next president/fed chairman) vs. thinking of the future consequences until the bubble grows ginormous and finally blows up which I believe is coming soon, as they have a scapecoat in Russia to attribute to so now is the perfect time to pop the bubble and reset everything.