Are Fed Critics Overcorrecting For Recency Bias?
Nearly every media article about Fed policy and US inflation is a contradiction.
Commentators and pundits of all sorts seem oddly oblivious to the cognitive dissonance inherent in describing aggressive tightening as something that "should" happen, only to say, in the very next sentence (and sometimes in the same breath) that such a pivot risks a policy mistake.
So, effectively, the message to the Fed is that they should commit a policy error. Small wonder officials are predisposed to being alo
I absolutely agree that halting MBS purchases is not only prudent but would halt another epic housing bubble in the making. With housing prices where they are currently, I doubt the investment made in these MBS’ will actually end up getting paid back, instead we’ll see massive defaults.
It’s ironic to me that the only bad inflation anymore seems to be CPI inflation. When markets are inflating like crazy everyone, Fed in included, seems to think that’s somehow good inflation. Does it matter that being a millionaire is no longer even the bar for middle class retirement? I guess not. The hottest housing market ever the past 18 months also wasn’t counted as bad inflation. Even though we’ve already seen systemic market spillover from a housing bubble failure in the very recent past. And as it was pointed out earlier, secondary education inflation has been running rampant for decades. My parents were able to go to college working a part time job with no student debt. I had to borrow some money to go to college but nothing extreme. The Covid generation will have to borrow a home’s worth of money for their education.
I think while it’s important to worry about a future Fed policy mistake, what we’re ignoring is that where we are right now is because of existing Fed policy mistakes. Those mistakes are already baked in now and just because the Fed has to respond to inflation doesn’t mean those policy decisions are mistakes, instead they are going to reveal the policy mistakes of ignoring inflation that should have been raising alarm bells a while ago.
When inflation gets bad enough to have a negative impact on both small and large corporate sales and profits ( due to slowing demand), human ingenuity will figure out how to produce a lower priced model ( Ford Maverick) and reduce cost structure ( automation) to drive sales and profits. This will be way more effective at dealing with inflation than any CB actions.
Cool, when will that be and what happens to American purchasing power in the meantime?
Also do these non fed mechanisms apply to housing?
I’m seeing it on the financial media, financial message boards, and the local news. Inflation hysteria has taken hold. With the views generally lacking context nor any depth of understanding, including the “experts” who have rendered themselves as reactionary propaganda puppets (El-Erian, Summers) for the investor class.
As well as being weaponized by the GOP as a reason to oppose social spending and boost their 2022 election chances.
I think the complaint on a policy error is more that the Fed could have started much earlier in easing back on accommodation. Thus, the error is that they artificially get demand super high and now have to deal with the issue of how to slow demand enough to allow supply chains to catch up
If the group of American people most negatively impacted by inflation spend almost all of their money on food, rent and interest payments on student debt and/or credit card interest- call me skeptical- but I am not convinced that the Fed curbing bond buying and minimally raising short term rates 2-3 times in 2022 is going to significantly help that large subset of Americans.
Short term (2022) fed action may not help “significantly” but it might help at the margins. Reducing speculation in many assets, commodities included, can help to ease some producer costs. Reducing the prevalence of ‘buy now pay later’ programs can also delay/destroy some demand. Slowing the growth (or possibly shrinking) the price of housing is also helpful.
We can argue about what “significant” means.
Many act as though the fed has a mandate to support markets instead of supporting price stability.
If the fed “can’t do anything” about inflation they need a new stated purpose for existence. One that might not be as popular amount the masses.
The Fed is also charged with helping employment and providing for a stable banking system.
I would argue that the Fed shouldn’t even care about the market. The market in bubble finance is actually bad for the banking system.
when the fed thinks it might not be up to those tasks it quickly seeks emergency powers to ensure it is. It doesn’t say “nothing I can do about it”
The inflation narrative has been a mainstream media narrative for a while now and is clearly now a political narrative heading into next year’s mid terms. That said, if the past 6 months has told us anything, it’s to ignore such narratives when it comes to investing, given some of the s best performing exposures since the narrative went mainstream have been disinflationary beneficiaries like the US dollar index, long duration Treasuries, and high quality/profitable growth names. In contrast, supposed inflationary beneficiaries like precious metals and EM (both equities and FX) have fared poorly.
The only data point that matters anymore is the Fed. Inflation sucks and it’s going to impact the people who don’t invest anything more than anyone else. But the market is purely Fed driven. If they continue with tightening it will dip. Welcome to Japan.
Given El-Erian’s recent statement he is now entering the same category for me as Larry Summers- aging prize fighter- he used to be good. Powell is not infallible certainly. But at least he admits mistakes and adjusts. I want to see El-Erian and Summers admit they were dead wrong if inflation and the economy slow down in 2022s second half. I would bet they won’t utter a peep. The Fed may have been a few months late tapering. Everyone is whining about the Fed. Nobody has or had a crystal ball- and guess what we are still in the middle of a horrible pandemic. So lets see. They let the economy bounce back, and in doing so combined with the reopening from a dead stop shock inflation took off. Guess what? The FOMC has been trapped at the zero bound. If the boo birds are right there is a straight forward solution. End Q/E quickly and then if necessary raise rates. If the FOMC raised rates and got to a 1.5% target in 18 months that would be the opposite of terrible. At least we are off the zero bound. Isn’t that what everybody wanted? What would Larry or Mohammed do if the economy rolled over with monetary policy? Oh yeah crickets. Too- look at what other developed markets are experiencing. The ECB had less fiscal/monetary stimulus. Guess what? They also have pretty high inflation too. And the US yield curve is in a bull flattener recently. Does that suggest the Fed is too late? If they were, we would be seeing a bear steepener of the curve. Probably 2/3 of the current inflation problem is a supply side problem- monetary policy has no answer for that problem. So, put me in the camp that El-Erian and Summers are full of sh-t and are coasting off their prior reputations. I think they are dead wrong, and arrogant to boot, and I hope Powell and the FOMC ignore them.
Well put!!
Inflation is a supply side problem exacerbated by lower dollar costs. Would housing be doing what it is currently doing without the Fed buying up MBS’? I highly doubt it. Would the markets still be going up with 11M open jobs and a new Covid variant without the Fed easing? Doubtful, before Fed easing we had a 1 month recession. Again, CPI is the only inflation that’s bad anymore? The data was there in May that inflation was here to stay based on supply chain issues from 2020 finally catching up and continuing impacts of new Covid slowdowns and the energy crisis in China. That should have at least started the tapering discussion, if they had been paying attention.
Bravo. Thank you for your articulate and spot on comment!
Why was the purchase of MBS ever included in the QE program?