There’s a suspicion in some corners that the Fed, for all its bluster about being committed to restoring price stability as we arbitrarily define it, will ultimately countenance higher inflation.
Loudly proclaiming that an economy defined by runaway price growth is an economy that “doesn’t work for anyone” is a strawman. Nobody wants hyperinflation. But it’s far from obvious that, say, 3% inflation isn’t tolerable if it means running the economy hot enough to support better outcomes for labor and Main Street.
Main Street in advanced economies hasn’t exactly prospered in the era of disinflation and globalization, after all, and for the better part of a dozen years, central banks cited disinflation (and the threat of deflation) as an excuse for perpetuating asset price bubbles that primarily benefited the wealthy.
I’ve yet to hear a single economist or market observer make a compelling case for why, if inflation were to stabilize between 3% and 3.5% with positive real wage growth and a reasonably balanced labor market, the Fed should deliberately engineer a recession in order to make a point about monetary policy’s capacity to hit an arbitrary target. Frankly, I don’t think there are many compelling arguments for such an assertion, if there are any at all.
I doubt BofA’s Michael Hartnett would agree that stopping before the “job is finished” (as Jerome Powell insists he won’t) would be a good idea, but Hartnett does recognize the possibility that the Fed will ultimately (and tacitly) concede a higher inflation target.
“If the Fed’s done and the first rate cut is in June, current trends indicate US headline and core inflation will be between 3-4%,” he wrote.
The figures illustrate the point. If the Fed does start cutting rates in Q2 and the trends in the charts hold between now and then, it’d be “an implicit admission that the Fed is tolerating a higher inflation target,” Hartnett went on.
Stocks would probably be fine with that, at least initially — it’d be a relent and “could be interpreted dovishly especially in an election year,” Hartnett pointed out.
In addition, he noted that risk assets may be countenancing elevated rates and yields on the assumption that, given what are likely to be persistent demands on fiscal policy, higher yields will ultimately “deliver yield-curve control.”
“Central banks are still in the business of bailing out Wall Street, and governments are very much in the business of bailing out Main Street, so investors [might] simply assume the debt will ultimately be nationalized via YCC policies across the G7 to bail out governments.”
I would guess that there is some analysis somewhere within the fed that established the 2% average inflation target. It is probably filled with assumptions and parameters which are impossible to measure. It is possible that someone could produce another model that says some other number is optimal based on different assumptions and value judgments that would be valid as well. I don’t think the fed will change their target, or else there will be lots of questions about why and then they will have to explain where the new target came from and it is just an endless can of worms.
I’ll probably be wrong about this, but I doubt that QE will be coming back. The original QE1 and TARP were necessary to get out of the crisis that the Fed helped create. Every other iteration beyond that was counterproductive. Maybe the 2020 version was necessary but way overdone. If we make it to 50 years into the future and all the policymakers who implemented it are dead, economists will label QE as a major policy mistake.
You won’t just “probably” be wrong about QE, you will absolutely, 100% for sure be wrong. QE will be with us forever in one form or another.
QE, though unlabeled as such, will likely rise again. As has the notion of “austerity” as a cure all for economic stagnation. Exhibit A is the parade of GOP presidential hopefuls clamoring for spending cuts along with their allies in the “Freedom” Caucus in the House of Representatives.
I agree with Walt on this one. I doubt we will see anything but rates remaining higher for a longer time. It will carry over into next year. But I’m hoping the higher for longer proposition will subside by mid-2024.
Other matters concern me for the longer term. Russia has put its cards on the table. They’re very bad actors on the world stage, as evidenced by the actions of Catherine the Great, who lives in the form of Vladimir Putin.
The Ukraine is firing 10,000 155mm artillery rounds every day in its wide counter-offensive. The west is supplying Ukraine, but can the west sustain such a volume of ammunition production? Only now is ammunition production becoming enabled broadly in the US, Germany, Sweden, etal. But here’s a hard fact: The US can produce only 14,000 of the shells per month. It’s not going to happen quickly.
There’s reason to believe in the meantime that the lack of artillery shells will stagnate the Ukrainian offensive. It very well may, by necessity, create a highly undesirable stand-off. Putin proves himself to be a belligerent actor and the west is slow to perceive his intentions, thinking of him and Russia still in 1991 terms. No, he’s a bad ass. He wants the Ukraine. And he wants the Baltics. And the west needs to address his actions on these terms.
This war cannot be minimized or rationalized. It’s not far from becoming World War III. And however it plays out, it will affect us all.