A few years ago, I wrote my “famous” blog about that time when the Fed offered to mow my lawn.
I highly recommend reading it, as it takes about a minute, will likely make you smile, and is a perfect metaphor for how the Fed operates.
Yesterday on CNBC, Cleveland Federal Reserve Bank President Beth Hammack reminded me of how accurate my lawn-mowing blog was.
Ms. Hammack called for rate hikes due to inflation concerns – and her comments sent rates sharply higher, as she is a “voting member of the Fed” (she gets to vote on Fed policy).
This is all well and good, but her reasoning and comments were suspect.
She said that high oil prices will cause inflation, but when asked about today’s far lower oil prices (back to pre-war levels), she said they would cause inflation too (“because consumers will now have more money to spend”).
Yeah…I am confused too.
She also informed us that a hot economy and AI would cause inflation.
And a month ago she told us her base case was “hold for some time.” But the only thing that changed since is oil prices…falling by 30%.
What She Missed:
- Hot economies don’t cause inflation – IF they are a result of actual investment (as opposed to government spending) that results in more productivity (more stuff).
- AI will likely foster deflation much like the internet did in its early days. The internet fostered massive efficiencies that reduced costs and helped tame inflation, despite Greenspan’s low rates. AI will likely do the same, as Fed Chair Warsh has explained in contradiction to Ms. Hammack.
- The money supply increased at a record rate in May. This will cause inflation (just not for a while) as the money supply is the primary cause of inflation. This should be her primary focus, but she didn’t even note it.
- Pending shortages will likely foster inflation as well. Analyst Chris Whalen says we’ll likely see double-digit inflation this fall because the war in Iran has created major shortages of numerous goods (food, energy, fertilizer, industrial supplies, etc.).
In other words, Ms. Hammack should not be allowed to drive, let alone vote on the monetary policy for the largest, most powerful, and most complex economy in world history.
Final and Most Important Point
The impact of Ms. Hammack’s ill-timed, illogical, ill-conceived, ill-advised, and ill-begotten comments will be short-lived (especially in Illinois).
This is because the bond market controls interest rates, not the Fed. The bond market will soon return to responding to actual economic data rather than Fed comments.
