The Fed & Inflation
More work to be done
Over the past year, central bankers have assured us they’re not behind on inflation.
- Feb 3: Bailey (BOE) - We are not behind inflation
- May 11: Bostic - I do not think the Fed is behind inflation
- May 7: Bullard - The Fed is not as far behind as the 2-year suggests
- May 24: Lagarde (ECB) - We are not behind inflation
- June 16: Quarles - We are not behind the curve on the inflation front
- Aug 5: Pill (BOE) - We are not behind the curve on inflation
Sounds like they’re trying to convince themselves and us. Let’s take a look…
The Fed is not only behind, but they’ve also been behind, and what’s worrisome is it looks like they’ve got a lot of work ahead of them. Sure, they’ve raised rates, and you can now earn some interest on your savings, but you’re still losing 4-5% net of inflation.
To put it in context, they need to raise rates almost 5 times the amount they did yesterday to catch up with inflation. Yes, monetary policy is getting tighter, but we’re nowhere close to a tight state. Real rates are still negative.
What else is behind the curve?
The 30-year fixed rate mortgage. With all the tumult over higher mortgage rates, you can still borrow at a negative 1 percent rate. Perhaps this is an unintended consequence of the policy reaction to the pandemic. I found this chart fascinating.
Where does the Fed want to see economic growth slow?
- The jobs market
- They would like to see more slack in the jobs market, but good news is bad, and we still have close to 11 million job openings. That is almost 2 openings for every person actively searching. The jobs market has been extremely resilient.
- Real Estate
- It looks like they might be taking a sledgehammer to 20% of GDP via the housing market - that’s one way to slow the economy.
Our take from the Powells press conference yesterday: The Fed made it clear they will not stop until inflation falls. Even if that means pushing the economy into a recession - and that is what the yield curve is telling us as well.
The yield curve is an expression of current policy and where investors’ expectations for future inflation, rates, and growth intersect. An inverted yield curve is a signal for caution ahead.
Feel free to reach out with any questions or further discussion.