The Fed’s credibility problem is beginning to grow again.

And no, I don’t mean the Austan Goolsbee soap opera. Allow me a quick word on that, though.

Everybody’s a partisan in America, and the selection process for top jobs of all sorts is fraught with conflicts on interest, some of which are so egregious as to be wholly laughable. Who knew, right?

If we want real technocrats, in the strictest sense of the term, and relatedly, if we want totally unbiased Supreme Court Justices, we’d have to raise such people. We’d have to keep them entirely isolated from the rest of society in special communities we construct for them, and only let them out once they’re old enough to assume the jobs we’ve chosen for them. Even then, they couldn’t be permitted to commingle with the rest of society, because they’d be corrupted immediately and irrevocably.

So, unless we want to adopt some kind of unnervingly archaic, roles-based social system where some of us are born into bureaucracy, reared in robes or raised as warriors, we’re going to be confronted at annoyingly regular intervals with uncomfortable optics like those surrounding Goolsbee’s two-month-old stint at the helm of the Chicago Fed. Or like Ginni Thomas telling Mark Meadows, in a text message, that “the Left is attempting the greatest Heist of our History.” And on, and on and on.

Moving along, the credibility problem I was referring to above relates to the juxtaposition between recent economic data and the perception that the Fed is now inclined to be less aggressive in the inflation fight. “The Fed right now should have the door wide open to a 50bps move in March,” Larry Summers told Bloomberg Television, for this week’s gripping installment of “Wall Street Week.” “A reasonable assessment of where the Fed is would say they have not been this far behind the curve for a year or so.”

I wouldn’t disagree with Summers who, by the way, is a partisan. Summers didn’t spend two years deriding key elements of the Biden administration’s original stimulus plan because he’s a committed Republican. Rather, Summers is a committed narcissist. No force on Earth — not even party politics — is sufficient to dissuade him from seizing an opportunity to be right when everyone else is wrong.

Critically (and this is why I bothered mentioning Summers this week), he cited a series of revisions which, together, effectively suggested that progress on the disinflation front ended in Q4. When taken with January’s hot macro numbers, muscular reads on spending and, this week, upward revisions to unit labor costs+, the reality appears to be that the Fed lost momentum late last year. Don’t forget that the second estimate of Q4 GDP came with a sizable upward revision+ to core PCE.

Unfortunately, it appears inflation is indeed embedded across the economy, particularly in services, but this week’s ISM manufacturing report suggested input costs are rising for factories again too. The color accompanying S&P Global’s PMIs for the US indicated firms are growing more confident in their capacity to pass along price increases to consumers. That’s the opposite of what needs to be happening.

Corporates aren’t going to “take one for the team,” where that means absorbing higher labor costs and raw materials prices. If they can, they’re going to pass those along in the form of price hikes to protect margins. Consumers will see that, and then incorporate it into what they demand from their employers on the wage front. And so on.

If the data doesn’t cool, one of two things seems inevitable. The Fed will have to concede that 2% inflation probably isn’t achievable, or else they’ll need to escalate the fight in such a way as to convey a clear-cut intention to engineer a recession and/or a deep correction in equities and housing that wipes away the entirety of the wealth effect from the pandemic boom in stocks and property values.

That may seem draconian, but consider that even after three consecutive quarters during which household wealth receded, Americans (those fortunate enough to own stocks and property, anyway) were still $32.83 trillion richer than they were following the $6 trillion wipeout that accompanied the original pandemic stock market swoon.

The value of corporate equities was still up $10 trillion from March of 2020 through the end of Q3 2022, and given equities’ performance in Q4 (to say nothing of the January rally), that figure is higher now. Property values rose $819 billion in Q3 of 2022, and that was the smallest quarterly gain in two years!

Little wonder, then, that inflation across an economy that depends on consumption hasn’t slowed anywhere near target in an environment where labor is extraordinarily scarce.

Measured against Q4 2019 (so pre-pandemic levels), there’s $26 trillion in “extra” household wealth competing for goods and services, the provision of which is hampered by lingering supply chain distortions exacerbated by commodities volatility and an acute worker shortage, respectively. (That figure is the same regardless of whether you use the “households and nonprofits” aggregate or the narrower version.)

Bottom line: All interested parties should probably hope February’s key economic data, which will start rolling in next week, doesn’t look like January’s figures.

From a tactical (i.e., near-term trading) perspective, I’m on board with the idea that the bar to clear for upside, hawkish “surprises” is now very high, and thus it’s entirely possible that the next trade could be lower for the dollar and yields, and perhaps higher for equities.

But, from a 30,000-foot view, we seem to be getting perilously close to some kind of reckoning where everyone runs out of excuses. At some point, it may be incumbent upon us to acknowledge the possibility that the most expedient way to bring inflation down is to deliberately destroy the ~$30 trillion in “excess” wealth created since Q4 of 2019.

Oh, by the way: An update on household net worth is due next week.