Last week, CPI data came in cooler than expected but Jerome Powell’s rhetoric remained hot. The Federal Reserve raised rates by 50 basis points and the Fed chair maintained a hawkish tone. Peter talked about the CPI data and the Fed meeting in his podcast. He said the bottom line is the Fed is still completely oblivious to the disaster it has created.
Despite some optimism that CPI is cooling, Peter said we’re never going to get back to the 2% target, given the state of the federal budget, the massive deficits, the amount of money that’s already been printed, and the amount of money it will need to print to monetize the debt.
That is the really important point that seems to be lost on everybody. What investors are trying to figure out is ‘has inflation peaked?’ Have we seen peak inflation? Now, I think the answer to that question is no. I don’t think inflation has peaked. Now, it may have peaked for a short period of time. It may take until the second half of 2023 before we get a year-over-year rate of inflation that was higher than the high water mark for 2022. Who knows? Maybe it will take into 2024. But the one thing that I’m certain of is that we’re not going anywhere near 2%. And that is what investors still don’t understand — that the days of low inflation are over, and we’re living in an era of high inflation. That is a complete game-changer for the Fed and the Fed has yet to come to terms with this new reality, nor has the market.”
Investors who are playing by the old rules will lose if they don’t adopt their strategy to the new reality of high inflation and higher interest rates.
Despite the cooler-than-expected CPI data, there wasn’t any signal that the Fed was softening its resolve. In fact, Powell said, “We have a long ways to go to get back to price stability.”
One of the first things Powell said in his prepared statement was that the Fed understands inflation is causing hardship for the American people.
Now, what you really have to do is substitute the word ‘government’ for ‘inflation.’ Because, if inflation is causing a hardship for the people, well, why do we have inflation? Inflation was caused by the government. So, if inflation is causing hardship, it is the government that is causing hardship.”
Peter said Powell should be apologizing for the hardship and acknowledging his role in creating it.
But no. Powell acts as if inflation just came out of left field – that it has nothing to do with bad fiscal policy or bad monetary policy — that it’s just an unfortunate and completely unforeseen consequence of multiple events that were completely out of anyone’s control, having something to do with the COVID pandemic, the reopening of the economy, Putin’s invasion of Ukraine, and now Powell is leading the Federal Reserve cavalry that is charging to the rescue!”
Powell conceded that the economy has slowed down from its rapid pace. But Peter pointed out that we never really had a rapidly growing economy.
We just had a lot of inflation that masqueraded as growth. We had a lot of Americans spending their stimulus money, running up our trade deficits, but that wasn’t real economic growth.”
Powell continued to hold out hope for a “soft landing,” meaning he thinks the Fed can defeat inflation without tipping the economy into a recession. But despite his optimism, he confessed he doesn’t really know the trajectory of the economy.
I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not. It’s not knowable.”
Peter said it seems he is “waffling a bit” on his soft landing.
He’s just basically saying, ‘We have no idea what’s going to happen. We’re just hoping we get a soft landing.’ But nobody actually knows whether we’re going to get a landing at all.”
When asked about the pain of inflation, Powell said Americans would suffer worse pain if the central bank failed to act and let inflation run out of control. Peter said that ship has sailed.
The reality is inflation is already out of control. We’re already past the point where the Fed has the ability to regain control without causing not just a recession but a financial crisis.”
Keep in mind that not long ago, Powell said it was better to let inflation run a little hot than dampen economic growth because inflation would be easy to solve.
Well, he’s now finding out that it’s not only difficult to solve; it is impossible without inflicting the very sort of pain he’s now convinced can be avoided because he thinks his too little too late effort is actually going to succeed.”
Peter said the bottom line to the whole press conference was that Powell and the rest of the FOMC members are still completely clueless about the problem they have created.
They still think that we have a robust economy. They still think that inflation can be brought under control and that everything is going to be fine. … They are completely oblivious to the disaster that they have created in the same way that they were completely oblivious to the 2008 financial crisis even in the summer of 2008 when the crisis was just around the corner. They have no clue that what they’ve been looking at is just the mother of all bubbles. There has been no legitimate economic growth over the past decade or more because of Fed policy.”
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