November 21, 2022
We spend a lot of time talking about the inflation picture here in my daily notes, and for good reasons.
Among the reasons: We had record money supply growth, driven by the monetary and fiscal response to the pandemic, and related lockdowns. When the money supply grows faster than the economy’s ability to produce goods and services, you get inflation (too much money, chasing too few goods). It’s that simple.
With that very simple formula, in plain sight, it’s hard to believe that Fed officials, in unanimity, could call the inflation of last year “transitory.”
Equally as hard to believe, they unanimously flip-flopped late last year, becoming tough-talking inflation fighters, yet they started their inflation fight (against a forty-year high inflation rate of 8.5%), by raising interest rates a whopping 25 basis points — that’s from zero interest rates. Meanwhile, they continued with their inflationary bond buying program (i.e. QE).
They’ve since, in unanimity, outright threatened to crush demand and jobs, and have promoted a draconian interest rate outlook. In doing so, they’ve crushed the stock market. They’ve crushed economic growth. And they’ve produced an inverted yield curve (which has a history of preceding recession).
And now, as we discussed in my Friday note, inside of one year, the pendulum has swung. A year ago, they were executing inflationary policy in a hot inflationary environment. Today, instead of just slowing inflation, they are now executing deflationary policy into an environment of declining prices.
It all looks like mismanagement at every step. And, again, the policy path has been unanimously supported and promoted by the Fed Governors and Fed Presidents … until today.
Finally, we may have a dissenting voice from the Fed (though not from a voting member) — introducing some sanity. San Francisco Fed President, Mary Daly, in a prepared speech today, said that the “markets are acting like [the Fed Funds rate] is around 6%.”
She’s saying that financial conditions are much tighter than the 3.75%-4% Fed Funds rate. And her 6% “proxy rate” (as she called it) happens to be right in line with the core inflation rate. It’s an important dissent in what has been an unexplainably agreeable Fed.