In this weekend’s Deeper Dive, I dug into the many ways in which Powell’s words show a strong bias toward rate cuts that is likely to cause him to treat rising inflation like it is only transitory. That means today’s Fed may be as likely to let the growth in inflation go until it, again, becomes so hot it is hard to take back down. Because we never learn!
One example I gave was how Powell acknowledged January’s inflation was a lot hotter than the Fed would like to see and that February’s was climbing, though not as intensely, yet said both were likely to be “seasonal problems.” I gave a number of other examples where he was leaning too hard toward the returning rise of inflation being something that will, in his view, likely take care of itself. He admitted the Fed needs to be vigilant for the opposite prospect, as it waits to see if inflation takes care of itself … just in case the Fed is wrong.
We’ve seen this script before. Powell should be nipping inflation in the bud right now before it nips him and all of us in the butt. He should have done that with another 25-basis-point increase in March in order to curb all the loosening of financial conditions the lunatic speculative markets have done for him. In November, he said the market was doing the Fed’s work for it by tightening up financial conditions, but it has done nothing but the opposite ever since! He’ll pay a price (and so will we all) for not tapping markets and inflation on the head with a little get-serious rate hike. I’ve been saying he would need to do that in March but would lack the courage. Last week we saw him lack the courage. Today, we read in the news about how he needed to do that but didn’t do it.
Inflation’s new growth won’t be insignificant for long
One article below doesn’t even mention January’s hot inflation report but comments on the month that Powell said was less significant. The article says that the next report (to come out Friday) for that same month—February—is not as likely to come out insignificant:
The Federal Reserve’s preferred measure of underlying US inflation probably remained uncomfortably high in February, showing why central bankers are wary about cutting interest rates too soon.
That would leave annualized core price growth over the past three months running at the fastest pace since May. On a six-month annualized basis, the core PCE price index would also show an acceleration. What’s more, some economists expect the January figures to be revised higher following recent government reports on consumer and producer prices.
Powell missed his opportunity to nip this in the bud. Anything the Fed does is likely to have a delayed action. So, by the time that lag has gone by to where belated Fed action actually has an effect, these numbers could be rising quite significantly.
That stands in contrast to the end of 2023, when inflationary pressures were showing signs of settling back to the Fed’s 2% goal.
Schiff is golden on this one
Peter Schiff, who, admittedly, can be counted on to see inflation coming all the time, now says that what is coming will be an “inflation bloodbath.”
There’s no chance that inflation is going to go back down to two percent! All the data shows that inflation is on the way up. Plus, if you understand what inflation is, it has nowhere to go but up….
Schiff notes that PPI last week increased by more than twice the most conservative estimates. He blames the acceleration of inflation on the 13% federal deficit from Bidenomics. He also notes, as I did in my Deeper Dive, that current interest rates are nowhere nears as suppressive as interest rates had to become during prior rounds of inflation. They are, in fact, lower than the cooling rate hikes the Fed did in several previous rounds of tightening when there was almost no inflation at all to worry about. Now we have resurgent inflation.
Government spending is going ballistic. And all of it is stoking the fires for inflation.… There’s no downward pressure from five and a quarter, five and a half percent interest rates. Those rates are still too low.
He frames up the corner the Fed has painted itself into:
The Fed is going to cut rates because the country is broke. They’re not cutting rates because they won the war against inflation: they lost that war. They’re cutting rates because they have to avoid a financial crisis— a banking crisis. They want to try to reelect Joe Biden. They want to try to save the government from having to default and cut social security and cut Medicare, and so everything’s going to be cut through inflation.
And the article states that …
Powell’s dovish remarks are a textbook case of the Fed’s inability to unwind its policies.
That is what I see in the dovish slant in Powell’s words that have come at every turn, even as the Fed has held rates up and said it will have to hold them up longer than the market was expecting. The bias that leans toward cutting in how Powell phrases things betrays the Fed’s inability to unwind its former QE policies without causing a train wreck. I think Powell knows he’s on borrowed time and is afraid to go tighter, so he is once again hoping that the return of inflation is transitory. Let’s hope it is more transitory than the last transitory period!
“Bernanke— in 2009, when the Fed just started to increase the balance sheet— said that, ‘After the emergency, we’re going to bring it right back down to where we started. We’re not going to keep any of the bonds that we bought, because we’re not a banana republic. We don’t monetize government debt.’ Well, now you have Jerome Powell saying, ‘We are a banana republic. We do monetize debt because we want to maintain an ample balance sheet.’”
Bernanke said that as his explanation to congress to show them how quantitative easing would not be directly funding the government debt, which is illegal, even though it would be sucking up an enormous amount of Treasuries—beyond anything ever seen. The principle was that the Fed was not monetizing the debt because the QE would eventually be fully unwound. The government would eventually have to find all its funding elsewhere. The Fed would not simply be printing money to keep the government running.
We’ve now seen that QE is clearly permanent. Every time the Fed has tried to unwind its easing, it has wound up having to go back to even greater amounts of easing in order to end the damage caused by the unwinding. It has never managed to take its balance sheet down and keep it down since Bernanke spoke. The government is addicted to this money.
We haven’t experienced anything like [this kind of inflation] since the 1970s. The difference is we’re in much worse shape economically than we were in the 1970s, and we don’t have the ability to put out this fire. We’re not going to get another Ronald Reagan. We’re not going to get another Paul Volker, and even if they were there, they couldn’t do what they did back then because of the financial position, the weak position that America now occupies that it didn’t occupy back in 1980. So it’s a whole different ball game, and it’s going to have a very different ending.
There is no QT
Another article says that the Fed is actually easing right now, and that article is right. Even though the Fed is doing QT, all those banked reverse repo loans I’ve mentioned are flowing back into bank reserves and into the economy as quickly as QT is taking money out. So, the Fed is easing as it is tightening because of the trillions banks parked away with the Fed that are now being drawn back onto the banks’ own balance sheets.
As a result, QT is not creating any problems like the last repo crisis yet because there has been almost no net QT when you look at the liquidity being added back into the financial system from other directions. The reverse repo part of that flow ends as those banked reverse-repo loans of cash to the Fed all get drawn back. They run out very soon, and then QT will get real, and you’ll start to feel Powell’s plane quiver because its flaps are down. The instability of landing the great craft will suddenly be felt by the passengers as it lumbers out of the sky.
Central banks ignored monetary aggregates when they shrugged off the risk of inflation in 2020, and now they are, again, easing way too fast when the battle against inflation has not finished. Furthermore, the only real tool that central banks have used is hiking rates, because different parallel measures of money growth, including reverse repo liquidity injections, have kept money supply growth at an elevated rate….
There has been no relevant reduction in the money supply if we include the different layers of liquidity injections.
The result of this massive government spending via massive new debt is that …
You are basically becoming poorer to sustain an ever-increasing government size. The next time you read that massive deficits and monetary easing are good policies for the middle class, ask yourself why you find it harder each year to pay for goods and services.
JPMorgan calls the ease
Even JPMorgan’s chief researcher says financial conditions are very, very loose right now, not tight as the Fed would have you believe because Powell’s soft words have enticed markets to loosen, in spite of how the Fed has held interest, and because those reverse repo loans are still streaming money back into banks and ultimately into the economy.
JPM predicts all this government largess will increase GDP by yet another full percentage point this quarter. The Fed is also showing GDP revisions for higher growth in its projections. That is hardly the formula for seriously fighting inflation when it is rising. Yet, the Fed is still forecasting three rate cuts this year! As I asked in my Deeper Dive, why on earth would you be cutting rates when you see inflation rising for the last two months and are forecasting an increasingly hot economy at the present level of rates? It makes no sense.
Says JPM,
One of the things you just really have to take a look at is just the EASY financial market conditions…. The fact that you have these corporate bond sales and the financing conditions SO EASY has made people feel do you need that many cuts right now when you actually look at what’s happening in the marketplace?… Frankly, it looks like there is more cash than assets that are even available…. Powell’s comments also made it very clear that he isn’t really very worried about the January-February pop.
He wasn’t very worried about the original pop either.
And then there are those choked canals
Finally, take a look at the stories today about shipping changes due to the Panama Canal and Suez Canal that are now happening on land and around ports that look just like what we saw during the pandemic shortages, and say inflation pressures are not building from those two causes of potential shortages and rising transportation costs. Then look at today’s news, again, about oil prices, and say that inflation in the price of everything is not going to come out of the relentless increase in the price of oil that goes into everything. Do the math.
The math says there is more inflation in store, and the Fed is not even dealing adequately with the inflation that is already rising … because it can’t.