Has the Fed lost control of inflation? Some thoughts on future policy action

Wages are no longer keeping up inflation. By function, I predict a return to the mean; at least if the Fed hasn’t lost control due to global circumstances. Big gains in wages in 2020 gave way to losses in 2021-22

Based on traditional analysis, inflation should already be peaking

  • Where is this protracted pull-demand inflation coming from? Spending on most levels in the domestic economy has been falling off for months, yet price growth has remained stubbornly high.
  • Are domestic price growth rates sticky and due for a delayed reversion to the averages?
  • In a linear environment, the Fed should have acted a year ago in earnest to begin raising rates. I am of the opinion that it should now wait before acting too decisively.
  • The Fed now finds itself in a zugzwang position. Any major policy moves it makes now could make the situation worse.
  • Already, contemplated Fed policy action has driven the USDX up to nearly 20 year highs. This results in economic distortions, higher dollarized debt default risk, and inflation outside the U.S.
  • The Fed waited this long to raise rates, and based on recent macroeconomics trends it should probably hold off, lest it makes a countercyclical move and diffuses any economic growth potential.
  • The 1st quarter GDP printed at a much lower than expected -1.4%. Any move to rein in demand, which may be ebbing already, risks further economic weakness.
  • If the next two charts are any indication, inflation should fade. That is if we are operating under traditional assumptions.
The stimulus checks have long dried up. Intuitively, personal consumptions should eventually fall back as well to the long term average. Income was greater in 2020, spending in 2021 & 2022 to date
Federal spending is already tracking pre-COVID levels and is smaller in real terms when accounting for inflation

The Congressional Budget Office estimates that the federal government ran a deficit of $191 billion in March 2022, the sixth month of fiscal year 2022. This shortfall was the difference between $315 billion in receipts and $506 billion in spending. The March 2022 deficit was $469 billion (71%) smaller than the March 2021 deficit, largely a result of the winding down of most pandemic relief spending that was in place during March 2021.

For March, federal government revenues remained strong, rising $418 billion (25%) from the same period in FY2021 to a total of $2.1 trillion during this fiscal year to date. Through the first six months of FY2022, outlays fell by $622 billion (18%) relative to the prior fiscal year, reflecting the continued decline in pandemic relief spending.

What if inflation refuses to fade and has become global?

  • It won’t really matter what the Fed does in this instance.
  • I suggest the Fed hold off any harsh policy moves until it has a chance to assess the ramifications of what the data in the three charts above bring.
  • If the Fed can no longer employ traditional monetary policy measures to quell domestic inflation growth, strong actions now will only ensure a continued weak economy.
  • The fact that the most recent goods trade deficit was so unexpectedly large testifies more to the weakness of the global economy rather than the strength of the domestic economy.
  • The only outcome the Fed has proven itself worthy of changing so far is adding to the unwanted strength of the US dollar.
  • As the global reserve, a continued strengthening US dollar could have tremendous adverse ramifications for foreigners holding dollarized debt obligations. In that case, we will have foreign borrowers of US dollars trying to pay back their loans while navigating a weakening economy.

Indeed, the Fed is in zugzwang.

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19 thoughts on “Has the Fed lost control of inflation? Some thoughts on future policy action

    1. Just a banking cartel puppet trying to justify their foregone conclusion to raise rates. I think the Fed should not raise rates. I watched an interesting interview with Minerd from Guggenheim, who said that the Fed should treat the current era like the end of WW2, where inflation went away on its own. Inflation already seems to be peaking, and people cannot continue to pay high prices forever. Tightening now is going to whipsaw the economy, which is probably what the Fed wants. More volatility = more opportunities for insiders.

      https://www.youtube.com/watch?v=nmrOkB01Gho

  1. I have subscription to Zack’s and they’re pushing natural gas transport and production firms.

    GASS
    TK
    GLOP
    TELL
    TNP

    They seem to have some good trading action.

    1. I think GASS should go up it’s worth more than it’s current price. However it is a shipping type stock so I would not want to hold too long. I sold RDBX too early. Very odd how nobody wants a stock or talks about it a week ago and now everyone is buying it on no news. I can’t get back in at this point because of my rules, but it is still a low float with large short position.

  2. The central banks need to tighten and raise rates, so they have more ammunition when the next manufactured crisis appears.
    ————

    End of Easy Money Brings a $410 Billion Global Financial Shock – Bloomberg

    https://www.bloomberg.com/news/articles/2022-05-01/global-economy-faces-410b-financial-shock-as-central-banks-pull-back

    Bloomberg Economics estimates that policy makers in the Group of Seven countries will shrink their balance sheets by about $410 billion in the remainder of 2022. It’s a stark turnaround from last year, when they added $2.8 trillion — taking the total expansion to more than $8 trillion since Covid-19 arrived.

    That wave of monetary support helped prop up economies and asset prices through a pandemic slump. Central banks are pulling it back — belatedly, in the view of some critics — as inflation soars to multi-decade highs. The dual impact of shrinking balance sheets and higher interest rates adds up to an unprecedented challenge for a global economy already hit by Russia’s invasion of Ukraine and China’s new Covid lockdowns.

    Unlike previous tightening cycles when the U.S. Federal Reserve was alone in shrinking its balance sheet, this time others are expected to do likewise….

    Others are moving in the same direction:

    The European Central Bank has signaled it will end QE in the third quarter, a timeline that is complicated by the spillover from war in Ukraine.
    The Bank of England has already started to shrink its balance sheet by ending gilt reinvestments in February. It is expected to hike rates again in May, bringing the key rate to the threshold where policy makers will weigh active sales from their asset portfolio.
    The Bank of Canada’s passive roll-off of its balance sheet — opting not to buy new bonds when the ones it owns mature — is expected to see its holdings of government debt shrink by 40% over the next two years

  3. Biggest Treasury Buyer Outside U.S. Quietly Offloads Billions – Bloomberg

    https://www.bloomberg.com/news/articles/2022-05-01/biggest-treasury-buyer-outside-u-s-quietly-offloads-billions

    Japanese institutional managers — known for their legendary U.S. debt buying sprees in recent decades — are now fueling the great bond selloff just as the Federal Reserve pares its $9 trillion balance sheet.

    The latest data from BMO Capital Markets show the largest overseas holder of Treasuries has offloaded almost $60 billion over the past three months. While that may be small change relative to the Japan’s $1.3 trillion stockpile, the divestment threatens to grow.

    That’s because the monetary path between the U.S. and the Asian nation is diverging ever more, the yen is plumbing 20-year lows and market volatility stateside is breaking out. All that is ramping up currency-hedging costs and completely offsetting the appeal of higher nominal U.S. yields, especially among large life insurers.

    The upshot: Japanese accounts are contributing to the historic Treasury rout and may not return en masse until the benchmark 10-year yield trades firmly above 3%. In fact, near-zero-yielding bonds at home look ever-more appealing even as U.S. debt offers some of the highest rates in years.

    “The Fed is being super aggressive,” said John Madziyire, portfolio manager at Vanguard Group Inc. “Are you really going to buy when Treasuries will probably get to more attractive levels?”

  4. Major reversal for real estate in Sydney, Melbourne, Brisbane

    There’s been a major reversal in the property market, with prices stagnant following the massive real estate boom during the pandemic.

    https://www.news.com.au/finance/real-estate/buying/major-reversal-for-real-estate-in-sydney-melbourne-brisbane/news-story/7fd14a0bdfec5e61bb58c6d246a1c367

    House prices have slumped in a major reversal after the value of Aussie homes surged 25 per cent during the pandemic.

    Sydney and Hobart have been worst hit by the fear of rising interest rates with house prices falling in April for both capital cities, a new report has revealed.

    In Sydney, prices were down 0.1 per cent marking the first fall since early in the pandemic, while Hobart saw an even bigger drop decreasing by 0.44 per cent, which is the first fall for the capital city time since early 2018, the PropTrack Home Price Index report showed.

  5. Zugzwang is such an appropriate analogy. If your opponent puts you in zugzwang it suggests the superior ability you are faced with. In this case there is no opponent as the FED put itself in zugzwang, strategy for a planned sacrifice to make the ultimate winning move.

    We must be close to endgame.

    1. QE works great in a low inflationary environment. Before covid, QE was an excellent and long term viable solution for financing fiscal budget deficits.

      Since then, the trajectory was changed somewhere at the top on purpose (above the Fed) for an eccelerated depreciation of QE. It can only last another 2-3 years under current circumstances. Inflation here and incoming as the world gears up for war will ultimately ruin it. The people at the Fed are not stupid, they are just carrying out orders and the MSM run cover for it. Alt-media say the Fed people are stupid, I say the Fed heads have their marching orders.

      The Federal government already knows this and this is why it has greatly cut back on discretionary deficit spending. In real terms, the Dems have done a total 180° turn. They may blame Manchin in WV, but ultimately he was just a scapegoat. The Dems know they can’t initiate much of the spending they wanted to pass.

  6. If the weekend action in Bitcoin is any indication, the markets are not going to open up well overnight to kick off trading for the week.

    While Buffet’s weekend comments regarding Bitcoin was laced with hyperbole, the underpinnings of his argument stress the reasons why I don’t make a big deal out of owning it. What’s worse about Bitcoin is that its trading action seems to possess a high positive correlation to asset market price movements. Not only did it tank with stocks in early 2020, but it seems to be following the precise movements of the NASDAQ 100 currently. Gold on the other hand, performed as expected and provided an excellent counterbalance to the punishment stocks and Bitcoin took.

    I’m looking at the behavior of gold as an intermediate trading vehicle and I see a great relative price stability and a countercyclical movement with a high negative correlation to asset prices.

    Like Buffett says, nobody is short Bitcoin. Everybody’s holding it for the long term. I still see it at 85,000 within the next 4 years, and if that’s good enough for you then don’t sweat it.

    As for me, I like owning assets that generate income. I can sleep at night.

  7. i think food prices are going to rise even more corn is close to or over $8 per bushel, soybeans are up.
    fertilizer prices are up, all those increases are going to hit later. not to mention we have avian bird flu, and swine flu is happening again.

    1. I don’t see how they won’t. The damage keeps piling up in the grain and livestock markets.

      We’re being set up for doozy of a Fed miscalculation. You see the FT story regarding a noticeable rise in DKs in the Treasury trading market. During grad school in the early 90s I worked at large Japanese trust company, which was a subsidiary of Sakura Bank. At the time, Sakura Bank was the second largest bank in the world in terms of assets. I handled a number of custodian trades, and while DKs and such were common, it was mostly a bookkeeping error. The type that the Financial Times is mentioning is different.

      The dollar is getting more expensive and will continue to cause problems around the globe. We’re seeing the CCP devalue the yuan accordingly.

      Regardless of whatever the FED does at this point, there is no way out. The covid scam repainted the whole layout of the land and central banks are no longer able to rectify any of the current circumstances. I’m afraid this will continue grinding til war. This is especially true under the current dynamic in which each Central Bank ostensibly works independently.

      At the time of the announcement of the monetary and fiscal stimulus packages two years ago, we remarked that while we weren’t certain of the ultimate objectives, we knew the outcome in the asset markets. Now that the timeline to war has been established, we now know the objectives; planned well in advance and we’re left to decipher.

      Gird your loins, my friends.

      The recent Beijing Olympics were equivalent to the 1936 Berlin Olympic games in terms of our timeline to war.

      1. Chris, do you think the Fed is still in control? Much chatter on the alt financial sites that the Fed has lost it. The alt says the Fed is “trapped.”

  8. Get ready for a timely subscriber-only podcast and email; the timeline to war and other un-PC topics. A fun time for all.

  9. Powell Seen Slowing Rate Hikes After May and June Front-Loading – Bloomberg

    https://www.bloomberg.com/news/articles/2022-04-29/powell-seen-slowing-rate-hikes-after-may-and-june-front-loading

    —————-

    (Bloomberg) — Federal Reserve Chair Jerome Powell is likely to slow the pace of interest-rate increases after front-loading policy with half-point hikes next week and in June, economists surveyed by Bloomberg say.

    They expect the Federal Open Market Committee to raise its benchmark rate by 50 basis points at the May 3-4 meeting and do so again in June — the first hikes of that size since 2000 — then downshift to a series of quarter-point moves during the second half of the year. The U.S. central bank will also start to shrink its $9 trillion balance sheet in May.

    The survey of 48 economists conducted from April 22 to 27 forecast the Fed will lift rates to a target range of 2.25% to 2.5% by December, while markets are pricing in around 2.75% at year’s end. The last published forecasts by the Fed in March showed rates rising to 1.9% this year and 2.8% in 2023. The economists see Fed rates peaking at 2.88% in December 2023.

    The path outlined by the economists’ consensus is far less aggressive than that laid out by some forecasters such as Nomura Holdings Inc., which is projecting 75 basis-point hikes in both the June and July meetings. The most hawkish of the Fed officials, St. Louis Fed President James Bullard, has called for rates of 3% to 3.25% this year and has said a 3.5% rate would be justified.

  10. Some have suggested that we’re in a supply-deficiency inflation. I’d say that Shanghai is the most influential node of international trade. Shanghai is in lockdown (sic). Is the Chinese government colluding with the US government to drive prices up? But I don’t see bare shelves anywhere. I do believe the reports of parts shortages.

    I observe reduced business hours. Some business are closed three days a week now. Their pre-Coburg labor force isn’t showing up. What are Joe and Jane living on? Where did they go? Maybe gvt is secretly paying them to stay home (that is, no media coverage of continuing pandemic aid). The strategy is to strip out more small businesses and channel it to the corporate boxes. Remember, Wali stayed open when small suppliers were required to close or driven to close by Coburg propaganda.

    I also wonder how all this excess money is finding its way to Joe and Jane. We live in a wilderness of mirrors.

  11. I don’t think the inflation we’re seeing is due to monetary policy. It’s caused by “shocks” due to the Covid “pandemic” and now the Russia-Ukraine situation. Both the pandemic and the war were, of course, manufactured. While the demand shocks for travel and recreation might be legitimate (but temporary), most of the supply chain problems seem to be purely manufactured. For instance, I don’t see how Fed money printing is causing the price of lobster to double. The SoS controls key choke-points in every supply chain, which allows them to name a price. SoS jacks up the price via middlemen and then publishes articles about how “supply chain breakdowns” are proof of the pandemic (the fishermen and the restaurants are not making more — only the SoS middlemen are!). Leftists even cite these supply chain issues as “proof” that Covid is a real problem. They really think that fishermen and truckers are dying in droves, resulting in sky-high prices of food and commodities.

    The media narrative is shifting somewhat to the Fed being responsible for inflation, possibly because the Covid narrative has run its course for now (though it might be revived in the future). The Fed is possibly being set up crash the economy. The Fed itself is not helpless. In my view, the Fed and the SoS could set almost all asset and commodity prices to whatever they want them to be. The Fed does seem to be planning to raise rates too quickly, leading to a recession or worse. I believe Biden is worth little to the SoS, so they are willing to have the US suffer a recession or depression under him (they wouldn’t have done this with a more valuable asset Obama). This recession or depression might be what leads to the Great Reset.

    Another option is that the Fed pivots again and goes back to the good old days of QE under Obama and most of Trump’s presidency. I believe the Fed has the ability to make this happen. The SoS just needs to tell their middleman agents to end the supply chain issues and tell their puppets Zelensky and Putin to make a peace deal. (If the Fed acted in America’s best interests, I believe it would pivot to a neutral or even dovish stance.)

    Overall, I believe the outcome will come down to how much the SoS wants to punish the rest of the world in its Great Reset. The SoS could decide that enough of the rabble has been prevented from ever owning a substantial amount of assets and are condemned to wage slavery for the rest of their life, with rent, taxes, and basic consumption taking up all their income (but this was almost the case before Covid). Or, the SoS might be planning to do a far more brutal Great Reset, where everyone who is not in the tribe ends up owning nothing. Only the SoS and their agents can own assets and make a living through their government connections.

    The “Bad Outcome” seems likely to me, which is why the SoS went ahead with the Covid plandemic, the inflation crisis, and now the Russia/Ukraine war. I believe they are setting up for something big, which will culminate in the Great Reset and a CBDC tied to a social credit system.

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