Fed: “We’re Going to Beat The Shit Out Of You Until Inflation Goes Away”
Fed Chair Powell spoke today in Jackson Hole, Wyoming, in a much-anticipated speech – and it roiled the markets. Here is a brief summary in case readers are interested.
- CONTINUED RATE INCREASES/0.75% HIKE LIKELY. Powell implied that the Fed is going to continue raising rates aggressively, despite “some pain to households and businesses” (hence my headline above). The markets perceived this to mean that a 0.75% hike in the Fed Funds Rate (instead of a 0.50% hike) is more likely on September 1st now.
- RATES EDGED DOWN IN RESPONSE. While rates are mostly holding, they edged down a bit in response to Powell’s message – as the bond markets perceived the news as additional “inflation fighting” and/or as news that the economy will be further weakened.
- POWELL CAN ONLY “FIGHT INFLATION” BY STEMMING DEMAND. President Jimmy Carter did as much to help stop inflation as Reagan and Volker did, unbeknownst to most Americans. This is because he deregulated trucking, airlines, and energy production – which spurred a lot more competition and supply in all three areas. Reagan continued the trend and many prices started to drop throughout the 1980s. I point this out because none of this is happening now. Inflation is caused by excess demand, too little supply and/or too much money in circulation. A lot of macro pundits remind us often that the Fed cannot do anything to help with supply, like make more microchips or pump more oil. So, all the Fed can really do is destroy demand by weakening the economy with higher rates – and that seems to be the plan (hence, my headline once again). And given that Joe Biden is not Jimmy Carter or Ronald Reagan, supply-side help is probably not on the way.
- JEFF SNIDER THINKS THE FED IS NUTS! Jeff Snider of Eurodollar University fame (who I cite often because he is right so often) thinks the Fed is entirely out to lunch. He makes a very strong case for inflation waning on its own, as supply chains untangle, the COVID world returns to normal, and stimulus cash dries up (which seems to be happening now). Snider further implies that additional rate increases at this time are doing tremendous damage to an already very weak world economy. I tend to believe Snider because he is so accurate in his predictions, so I suspect the Fed might “break things” (cause a stock market crash, currency crisis, or some other economic crisis) sooner rather than later – which would likely bring 30-year rates down sharply. I highly recommend Mr. Snider’s podcast.
- HIGHER RATES GIVE U.S. POWER OVER OTHER COUNTRIES. This is a point that famous macro pundit Brent Johnson makes often and most recently in yesterday’s Macrovoices Podcast. He thinks the Biden Administration might be pressuring the Fed to raise rates partially because doing so strengthens the dollar (for a variety of reasons) and that puts enormous pressure on other countries like Japan, China, South Korea and much of Europe. This in turn gives the U.S. more power as those countries will have weaker economies and likely need to come to us for help.
- RATES HAVE RISEN BACK TO JUNE LEVELS. I was musing all summer that it was very interesting to see rates fall from their June peak, but they have risen back to June levels again, largely in response to some optimistic economic signals.
WHAT TO EXPECT?
I think we should expect more of the same to slightly higher rates … until something “breaks” (stock market crash, currency or sovereign debt crises, etc.) or the Fed “pivots” (stops its rate increases and/or lowers them). I personally expect something to break before the Fed pivots, but we will likely see one or the other sometime in the next 3 to 12 months – depending on which macro pundit you listen to.
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