Let me get this straight. In answering a question as to how the Fed’s plan for 2%+ inflation will help the average guy on the street, Powell explained that Fed wants higher inflation so it can get higher interest rates so it has someplace higher from which to reduce rates when the next economic downturn begins. In the meantime, however, they’re going to keep rates at or near zero for the next several years by continuing pumping billions of dollars into everything from treasuries to high yield bonds.
Powell admitted that the concept is a little confusing. What he should have admitted is that it’s hogwash. Just ask Japan, which in the past decade of hammering rates lower has generated zero lasting inflation. It has, however, reinflated Japan’s asset bubble and kept it from crashing again – which is exactly what the Fed hopes to do.
Here is Powell’s answer, verbatim, as to why higher inflation would be a good thing for the average guy on the street.
That’s a very, very important question and I actually spoke about that in my Jackson Hole remarks a couple weeks ago. It’s not intuitive to people. It is intuitive that high inflation is a bad thing. It’s less intuitive that inflation can be too low. And, uh, the way I would explain it is, um, is that inflation that’s too low will mean that interest rates are lower. There’s an expectation of future inflation that’s built into every interest rate, right? And, to the extent that inflation gets lower and lower and lower, interest rates will get lower and lower, and then the Fed will have less room to cut rates to support the economy.
And, this isn’t some idle, you know, academic theory, this is what’s happening all over the world. If you look at many many large jurisdictions around the world you are seeing that phenomenon. So, we want inflation to be, we want it to be 2%, and we want it to average 2%. So, if inflation averages 2%, the public will expect that, and that’ll be what’s built into interest rates. And, that’s all we want. So, we’re not looking to have high inflation. We just want inflation to average 2%. And, that means that, you know, in a downturn these days what happens is inflation, as has happened now, it moves down well below 2%. And, that means, as we’ve said, that we would, we would like to see and will conduct policy so that inflation moves for some time moderately above 2%.
So, it won’t be, these won’t be large overshoots and they won’t be permanent, but to help anchor inflation expectations at 2%. So, yes, it’s uh, it’s- it’s a challenging concept for a lot of people. But, nonetheless, the economic importance of it is, is, is large and, uh, you know, those are the people we’re serving, and, uh, you know, we serve them best if we can actually achieve average 2% inflation we believe and that’s why we changed our framework.
I include all the “ums” and “you knows” for a reason. Like most people, Jerome Powell, uses them as verbal crutches whenever his internal BS detector goes off. The question was how higher inflation will help Main Street America. Powell launches into an explanation of how higher inflation produces higher interest rates [true], suggests that higher interest rates would leave room for future cuts [also true], and that future cuts would support the economy [debatable.] He never comes close to the meat of the question: How does this help the average guy?
There are numerous studies which have concluded that official inflation figures are pure fiction. John Williams takes a statistical approach, showing how changes in how inflation is calculated over the years currently understate the actual rate by anywhere from 4-7%. Ed Bukowski’s Chapwood Index, which surveys actual prices on the 500 most-used goods shows a current rate of 10.8% in the 10 largest cities – 8x the government’s official 1.3%.
By the time official inflation tops 2%, actual inflation will be solidly in double digits. A family just barely making ends meet or who has plowed through their entire savings (50% of Americans) in the Age of Corona will certainly have noticed the obvious increases in food, rent, gas and medical prices, no matter what the Department of Labor says. Powell’s comments won’t provide much solace.
Those with substantial equity portfolios or with copious amounts of investment grade debt know that what the Fed is really after is a way to keep all the plates spinning just a little longer in the hopes that the wealth effect from the reinflated bubble will make an appearance.
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Futures are off sharply, closing in on our next downside target as we approach the open.
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