Fed ‘Pause’ Narrative May Be Wildly Overblown
Over the past 48 hours, the financial media (and Bill Ackman) leaped at comments from Raphael Bostic who, earlier this week, gently suggested the Fed could take a "pause" in September after delivering two additional 50bps rate hikes over the summer.
The fuss could be much ado about nothing.
"I continue to believe the market risks being disappointed," Nomura's Charlie McElligott said Wednesday, of the prospects for a "pause" option. "I think the Fed is simply biting off one to two months of (we
I continue to believe the market will dictate the Fed’s path. They were late to raise, so my working assumption for now is that they will be late to pause or pivot, should that prove necessary, unless the market forces their hand. Until then, anxiously waiting and watching for something to break with liquidity so impaired across many markets.
I would not want the responsibility of the Fed on my shoulders. Everyone has their knickers in a knot about the economy and inflation. But why is this happening?
The administration doesn’t want to admit that the current confusion is due in part to the large amount of money that was already in circulation in the economy when Biden ordered extra, unnecessary stimulus shortly after he came into office. Of course, there’s also a significant war going on that is impacting oil supplies, ergo the cost of food, and grain supplies. Neither do we hear enough about the direct impact of supply chain issues on inflation, for which our “dear friends” in China are responsible.
The Chinese lately seem to believe they can defeat the pandemic with the “awesome power” of the Chinese government’s force of will in locking down their largest cities. Not only is this bad for the Chinese economy and the countries that buy Chinese goods. But to the extent that China manages the pandemic through such black-death era means, it will continue to be bad for ongoing management of inflation in the US. (Recall the plague that originated in China during the mid-thirteen hundreds before coming to Europe over trade routes from Asia.)
Powell, I’m afraid, lacks sufficient backbone to stand up for his actions on the economy to assert a balanced approach to the current state of affairs. Granted, it’s no easy task. But Powell risks worsening the consequences on the economy from our current inflation if he and the Fed pursue an ongoing, heavy-handed posture. The Fed needs to express a realistic and accurate perspective of how we got into this pickle. Biden made a mistake. There’s a war. And the Chinese are the bad guys. It’s not worth hurting the broader economy unnecessarily as a result.
The Fed cannot impact oil prices resulting from the war in Ukraine. They can’t tell China how to manage the supply of goods. If anything, we need to magnify the need to take action in regard to supply chains. The extent to which the Fed can remove extra money from circulation would be a good thing. But Fed action or no Fed action, we will continue to have some level of inflation.
Please correct me if I’m speaking incorrectly. I’m no economist. Not even the armchair variety. I’m just speaking from the standpoint of common sense, and don’t want to see the Fed go down a rabbit hole.
The ackman tweet is Intersting but fails to mention the impact of Fed policy on nominal future earnings. While the value of future earnings gets hit with a better multiplier in the case of controlled inflation the earnings themselves will be lower. Presumably from multiple directions (increased borrowing costs and the read through for dilution, reduced nominal revenue, possible changes in consumer behavior)
I have studied economics since the mid-1960s and one thing that is immutable about the system of behaviors that characterize our economy is that it is aptly described by a version of Newton’s 3rd Law of Motion. No matter what actions we take to change the direction of economic outcomes, every benefit we gain for one group will be offset, at least partially, by a detriment to another. Higher prices are a disaster for consumers but farmers love them. So do commodity sellers of all kinds. A strong dollar is great for some and wrecks others. High rates make investors happy and retirement funds easier to manage but borrowers, of course are unhappy when the cost of debt goes up. No matter what Powell, or anyone else does to make things “better,” someone always loses. And, of course, when it’s the economy we’re talking about, one group of special interest voters wants XX to happen and another group hates that same outcome. Managing our economy today seems to me to be less about economics and more about guessing which change that gores which group’s ox is more likely to cause those responsible for the bad outcome of the change to lose their job in the next election. Me, I love higher rates because I’ll get more investment income and prices don’t really bother me too much because I can afford them. I hated ZIRP because it killed my investment income and put my annuities in more risk. No matter who we elect and who has their hands on the levers, the problems are still the same for all and no policy will create only winners. We can’t have our cake and eat it, too. A wise poly sci prof wrote me a note about this on my undergraduate thesis on the topic of economic optimization back in 1966. The effect of his observation is that there ain’t no such thing as optimization in a real (political) world. Bingo!
I agree that it’s a complex system with many winners and losers and second order effects (or unintended consequences).
I disagree that it’s all equal and there’s no optimization: eating all of the seed corn vs planting makes a big difference, investing in innovation and technology creates order of magnitude efficiency instead of a downward spiral of chasing a limited commodity supply – like wars over oil.
So financial tools may be able to provide more efficiency: adopting faster money transfers (rather than driving around trucks of gold accounted for by paper) certainly helped; the Fed’s too busy putting out fires to invest in the future (which would make all of us wealthier).
My only questions would be. Was Biden’s stimulus package unnecessary and is that the reason we are seeing inflation
in the US?
When you consider that inflation is a worldwide problem…..that seems highly unlikely…..and one has to think this is
more a supply problem than a demand problem.
Of course, enough demand destruction will probably quell inflation…..but at what cost?
Most of it was unnecessary sadly. And it did increase (and has) demand at a time when supply has been and is constrained. The other issue is too loose of money for too long. Buying mortgages during a housing bubble???? I mean serious? Wait until housing prices decline due to too high of prices and higher rates and tighter lending and less jobs and decimated down payments (due to stock declines).
How we get demand destruction is the key. A LOT of people over bought goods. So there is a natural demand destruction coming down the road. I would go higher personal taxes. I would NOT want for people to lose their jobs. The wealth effect on spending tends to be pretty small and I am not sure it matters for the average American. Getting more investment, productivity, etc is the key to increasing supply. Sadly, higher rates will give us less of that imo. How about eliminating taxes for oil and gas production and investment credits for LNG? And things like that to stimulate the supply side? Of course this all works will lags as well but at least it would give some a light at the end of the tunnel.
I suspect we will be talking about the need for “stimulus” in 12-18 months as inflation faces tougher comps.
So frustrating to see mistakes after mistakes being made for decades…………………………………
“After all, there’s concern on the Committee itself that the Fed’s credibility is at stake (i.e., Jim Bullard’s persistent warnings to that effect).” – Serious? Have we not looked at the last nearly 40 years? Bubble after bubble? Buying corp bonds, mortgages when no need to (during a housing bubble) and NOW we are talking about losing credibility?
Will raising rates to crush inflation (and of course rates have a lag effect) NOW give them credibility in my eyes? Will causing job loss and potentially cause many to never get as well a paying job as they had give them credibility? Will it rid of us of bird flu? End the war?
What about supply side solutions out of the govt? How about raising rates (retroactively) on high wage earners (yes, probably all of us reading this site)? How about cutting tariffs? How about allowing immigration? How about tax credits on energy production?
We always lamented about how the Fed has t do all the work. Then we get the ill-advised fiscal stimulus last year which helped cause this issue (and now we have a fiscal tightening that will work with a lag).
Our #1 goal is to preserve jobs in my opinion. Losing 2-3% real wages is better than job loss. We DO NOT want to create a hollowing out of the middle class and a stagnant decade like we faced after the GFC.
Where was the Fed when they pumped multiple bubbles and did NOTHING????? But NOW they might lose their credibility?
And on stock prices. I am not sure I want a lower discount rate to drive stock prices higher. I want innovation, investment, productivity, more trade opportunities, etc to drive stock prices (more future earnings and cash flow). I want more people to have better jobs. Value creating jobs.
If we see stock prices continue to decline I suspect we will see the opposite of the above. We’ll see job loss, cost cutting, less investment and lower prosperity for most Americans. CEOs are in the business of getting paid via stock option values and of course hitting profitability targets (bonuses). Why do they buyback overvalued equities rather than pay dividends? Sure there is some tax impact but I suspect there might be a bigger reason.
I also do not understand the inflation issue. Most companies are profitable. So if “inflation” is equal on costs vs revenue in theory profits will grow. Rev of $100 and costs of $90. $10 profit. Inflation of 10%. So revs of $110 vs $99 of costs. So $11 of profit (up 10%). So if inflation is eating into profits why do corps not have the supposed pricing power? Why aren’t they passing on the cost inflation? So is the inflation as pervasive? Labor is the biggest cost for most companies and wages are growing less quickly than costs they spend on “inflation”. So there should be a bigger benefit, right?
Sometimes companies blame something for poor execution. Ie, if we crewed up blame what is in the news. Oh, that is INFLATION.
Ok, I know this is too simplistic but I guess when I see all companies increasing their prices 7% per year then I will think a bit more.
And for a homeowner inflation is a bit different than for a renter. For the old it is different than for the young. And on and on. We tend to paint everything the same but there is ENORMOUS amount of nuance.
I realize the Fed has a very difficult job (as do the politicians). But to repeat the mistake of the past is ridiculous. Did we not learn from the 07/08 GFC????? Bernanke was not the right guy, not sure Yellen was the right person. Not sure Powell is the right person. But is there a “right” person? I just personally do not believe this economy can take significantly higher rates. If we do we will see QE4ever shortly thereafter imo.
I see some questioning of the Biden stimulus package and that it was unnecessary. In broad strokes, the stimulus package provided a $1,400 stimulus check, enhanced unemployment benefits and child tax credits, rent support, support to state and local governments and schools, and covid funding. What parts of those were unnecessary and contributing to inflation today? Since the benefits have largely expired, shouldn’t we see inflation abating rapidly if that was the case? Maybe these components had a moderate effect on inflation although it’s hard to tell exactly, but to me, this was almost all necessary and should be turned into permanent policy.
Great points there #dayjob. Bravo!
You make a very fair point that I did not consider in the moment I commented. I reckon, if it had any inflation impact, it would not at all have been a primary driver of inflation. Come to think of it, there was also a sad part to the story, because some of the money was obtained and spent fraudulently.
The Fed does not really know with any certainty what they will do- so nobody else does either. Right now they are tilting hawkish, so at a minimum we will see a fitty in June. Past that- ????
Seems to me that we suffer from collective amnesia. Cheap energy prices for years has made us forget about energy conservation. Fuel efficiency standards went out with Trump and America’s thirst for power and gas guzzling 4×4 s
resulted in our auto industry ceding the gas-efficient market to foreign auto producers.
The me first ethos in the US needs to be modified .
The benefits of using less energy would result in not only lower gasoline and natural gas prices. but also in less global warming and a reduction of obesity.
Learn to be comfortable with 65 degrees in winter and 75 in the summer. Learn to drive less; cycle and walk more.