This Is Not Your Grandpa's Inflation Problem

The Fed is starting to play catch-up with inflation signals from the bond market as evidenced by the Fed Funds Rate finally being pulled upward by the implications of the rising 3 month T-bill yield, among other more obvious signals like the long since rising 2yr Treasury yield and ongoing inflation headlines we read about every day.

After the June FOMC meeting, an additional .5% hike will be in the bag as CME Group traders are forecasting.

But as noted in this post about the May ISM (manufacturing) and Payrolls, supply chains are ever more involved in the narrative. Captain Obvious wants you to know that an economic drag is being caused by the past and present COVID-19 shutdowns, the war in Ukraine, and increasing global political tensions and saber rattling. Continue reading "This Is Not Your Grandpa's Inflation Problem"

What To Expect From This Week's Fed Meeting

Was last week’s tiny decrease in the August consumer price index just enough to dissuade the Federal Reserve from announcing this Wednesday that it’s planning to start tapering its massive $120 billion a month asset purchase program? The financial markets and the financial press interpreted (hoped?) the report signaled that inflation might really be transitory after all and that the Fed will have no reason to reduce its purchases—at least not yet.

The headline CPI number rose 0.3% from July, slightly below the prior month’s 0.5% jump. The year-on-year increase came in at 5.3%, down a mere one-tenth of a percentage point from July’s 5.4% pace. That prompted near-euphoria from some analysts that the recent spike in inflation over the past five months had mercifully come to an end, giving the Fed little reason to begin the taper soon.

Needless to say, the release a few days before of the producer price index, which jumped 0.7% from the prior month and 8.3% YOY, got much less attention, even though producer prices often presage higher consumer prices. Indeed, many manufacturers have begun to announce they must and will raise prices and make them stick, meaning inflation is anything but transitory.

The Fed, however, is likely to stick to its earlier policy intention to let inflation run “hotter for longer” and not make a commitment to start tapering just yet, despite recent comments from a bevy of Fed officials—including Fed Chair Jerome Powell—that it is poised to do so. The Fed never said what “hotter” or “longer” meant, but five straight months of 4%-plus annualized inflation may not have met the criteria, whatever it is. Instead, Powell has realigned his focus from inflation to the jobs market, fostering full employment being the Fed’s other mandate. And on that score, following August’s disappointing jobs report, we are definitely not in the taper zone just yet. Continue reading "What To Expect From This Week's Fed Meeting"

Has The Taper Been Tabled?

A funny thing happened on the way to the taper, the U.S. jobs market hit a brick wall.

Last week’s underwhelming jobs report for August, which showed the U.S. economy adding only 235,000 jobs—less than a third of the consensus estimate of 740,000 and down sharply from July’s upwardly revised total of 1.05 million, may have put the kibosh on the Federal Reserve’s prospective plan to start reducing its $120 billion a month purchases of government and mortgage securities.

Last month, you’ll remember, Fed chair Jerome Powell, in his Jackson Hole speech, seemed to have joined the bandwagon started by his central bank colleagues calling for the Fed to start the tapering process soon. “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said. However, he also provided this caveat: “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

Friday’s job report could have provided enough of a reason not to taper, or at least put it on hold. Particularly discouraging was the net no new jobs in the leisure and hospitality industry after adding 350,000 jobs a month over the prior six months, including a net loss of 42,000 jobs in bars and restaurants. Continue reading "Has The Taper Been Tabled?"

Powell Tempers The Taper Talk

Federal Reserve Chair Jerome Powell’s comments at last Friday’s virtual Jackson Hole Economic Symposium received different interpretations from the financial media, but the bond and stock markets seemed to understand that the Fed isn’t going to be embarking on any significant change in its accommodative policies in the near future; i.e., don’t worry about the taper.

According to the Wall Street Journal’s headline, “Powell Says Fed Could Start Scaling Back Stimulus This Year.” But Yahoo Finance had a much more circumspect take. Its headline read: “Powell: Reversing Fed stimulus too early could be 'particularly harmful.’”

“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” Yahoo quoted Powell as saying, although further down in its story, it added an additional quote: “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

As several other Fed officials stated, that seemed to seal the deal that the Fed will start the asset tapering process sometime in the fourth quarter and maybe wrap it up early next year. Left up in the air is exactly how much the Fed plans to taper and at what point it will stop, although Powell made it sound like it may not happen at all if economic changes intervene. In any event, the markets seemed to like what Powell said, as stock prices rose and bond yields fell. Continue reading "Powell Tempers The Taper Talk"

Does Inflation Matter?

The Great Inflation Debate continues.

Senator Joe Manchin, the West Virginia Democrat, became if not the first, but certainly the most prominent politician to sound the alarm about rising inflation and the Federal Reserve’s role in it.

“With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by continuing an emergency level of quantitative easing (QE) with asset purchases of $120 billion per month of Treasury securities and mortgage-backed securities,” the senator wrote in a letter to Fed Chair Jerome Powell.

This “has led to the most inflation momentum in 30 years, and our economy has not even fully reopened yet. I am deeply concerned that the continuing stimulus put forth by the Fed and proposal for additional fiscal stimulus will lead to our economy overheating and to unavoidable inflation taxes that hard-working Americans cannot afford. Therefore, I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus-response.”

Needless to say, as the Wall Street Journal pointed at, that concern hasn’t prevented Manchin from voting with his party to spend trillions more and add trillions more to the federal deficit.
(By the way, did you hear any criticism of Manchin for trying to “politicize” the Fed? No, me neither).

A few days later, we received the latest indication that inflation may not be as transitory as Powell and many others Continue reading "Does Inflation Matter?"