Posted on 01/30/2022 3:10:20 PM PST by blam
The Fed, Inflation, And Some Unpleasant Math
At last week’s FOMC press conference, Chair Powell was unequivocal about his discomfort with persistently high inflation. Had the January FOMC been a forecast meeting, he told us, he would have revised up his inflation forecast for 2022 by “a few tenths.” The Fed is set on tightening policy this year. Bringing down inflation through monetary policy means slower growth, but how much inflation and growth will decline is the question.
A dirty little secret about the economics profession is how imprecisely we understand the inflation-generating process. The Fed and most mainstream economists have in mind a version of an “expectations-augmented Phillips curve” to describe cyclical inflation. Inflation is driven by inflation expectations and whether the economy has slack and inflation falls or is overextended and inflation rises. That cyclical component ignores other short-term factors, like swings in oil prices or the current supply chain frictions, that can temporarily push inflation up or down. Framing inflation this way has some thorny implications for the next few years, particularly if most of current inflation is cyclical, not temporary.
Core PCE inflation just hit roughly 5%, or about 3 percentage points above the Fed’s target. If the extra inflation is cyclical, policy will have to slow the economy to create enough slack to bring it down. If it is mostly Covid driven and temporary, inflation will come down on its own. Our house view is that the majority of the extra inflation is Covid driven, not cyclical, but what if we are wrong?
Suppose two-thirds of the extra inflation (2 percentage points) is cyclical and only one-third is temporary. The Fed’s baseline estimate of the Phillips curve has a slope of about 0.1, that is, a 1-percentage-point increase in the unemployment rate lowers core PCE inflation by only one-tenth of a percentage point. Simple arithmetic says that a 20-percentage-point increase in unemployment is needed to bring inflation down by 2 percentage points. But even if the relationship is 5 times larger, as may have been the case decades ago, the Fed would need to orchestrate a 4-percentage-point increase in the unemployment rate to wring out those 2 percentage points of inflation. Any time unemployment has risen by 50bp, we have had a recession.
Of course, the Fed does not want to intentionally cause a recession, so something would have to give. The other refuge, of course, is inflation expectations. If the Fed can convince everyone that inflation will get back to 2%, the trade-off is much less painful. But some measures of inflation expectations are highly sensitive to realized inflation, whereas others barely budge. (Others have criticized the prominence of inflation expectations in macro analysis, see Rudd, 2021) .The real question is whether under the current circumstances, the inflation expectations that matter will move simply because the Fed acts, or if inflation has to come down first. If the latter is true, we are still stuck.
So if the bulk of current inflation is cyclical … a recession or years of high inflation. Chair Volcker opted for recession, but inflation in the 1970s was much, much higher. I suspect Chair Powell will not deliberately engineer a recession. The challenge, of course, is knowing how much policy tightening is too much. To be clear, our baseline view is that most of the inflation will prove temporary, but it always pays to ask “what if we are wrong?”
That would be ok with me. A silver dime for a gallon of gas seems fair.
Only an idiot, or a Democrat, or Joe Biden, would think this inflation is temporary. But I repeat myself,
The dirty little secret is that they do understand the inflation process. It results from increasing the money supply. They do everything in their power to hide and obscure this. It is a very sneaky way to tax liquidity. Not only that but as it pushes up the prices of everything they get extra capital gains taxes . This effectively turns their hidden currency tax into a hidden wealth tax as well.
If that were not incentive enough for the Government to create Fiat money it also reduces its debt load by making the debt effectively smaller. No wonder we see tools like this fellow trying to hide what inflation really is.
Reagan had one. The other one was Carter, 1980.
Or they could stop spending us into oblivion.
But that would make sense, and as we know they don’t have any.
FJB!
“Reagan had one. The other one was Carter, 1980.”
Point taken! 1980 hit while Carter was still in office.
Recessions are normal. Avoid them artificially and you will get a depression. We used to go through recessions with a lot less wahh-wahh.
Nonsense...
Why do we go back to the same people that have failed at their jobs?
A lot of our troubles could go away by lowering energy costs. Allow drilling in Alaska, the Gulf, Atlantic and Pacific coasts. Allow for drilling in the States.
Build new clean coal plants, nuclear plants and slowly phase out the Windmills.
Then end the Covid madness cut all income taxes for 5 years, eventually replace all income taxes with a sales tax of 10%, encourage businesses to come back by giving them tax incentives and put tariffs on imports for companies that do not build plants here.
Balance the federal budget and pay down the debt by selling federal lands back to the States.
Abolish the IRS and the Department of Education. Consolidate and reform the alphabets agencies, and if they can’t they are not fixable then abolish them and start over.
Finally secure the border, you can only come here if you are bring skills to the country that are in need, cut off all handouts for people that are here illegally, begin to repatriate them back to their country.
That would be a good start.... I know it’s a fantasy.
Sorry I did not do a paragraph for those who cannot extrapolate. If we continue with accelerating inflation or if we go into real recession/depression the result is that we cannot buy stuff.
In the long term, we are all dead.
It all started on day one when the sonofabich canceled the pipeline. All downhill from then. Thanks democrats for putting this puke in office. Ukraine and Taiwan will probably be thanking you too as the Afghanis already have.
The Fed has no options. They will have both a recession and years of very high inflation.
The is because the Government insists on spending money it does not have and effectively having the Fed print more money to cover the payments. Inflation is guaranteed.
Hyperinflation eventually chokes off the economy and guarantees a recession. That still does not stop inflation.
We have seen this movie before. We know how it ends.
Those of us in the real (non-political) world know it all too well. When the government prints and spends trillions, it has to disappear through inflation. It's as simple as that.
I interpolate just fine. Your statement made zero sense. People can buy things and will continue to buy things. I bought things throughout the 70s and 80s. I remember double digit inflation and interest rates.
It’s caused solely by Biden and liberal policies. Competition lowers prices, right now with crappy supplies everyone has to raise prices, but get ur country producing oil and running without restrictions prices will drop bc all goods are available and everyone will be going for market share
there are two basic causes of any inflation,
1. “too much currency” chasing
2. “too few goods/services”
the politicians have printed money like it was going out of style, trillions of fake dollars (with zero backing of any significant ind) and just doled them out (putting millions of American workers on welfare, effectively)
these trillions of new dollars are now chasing whatever goods and services exist in the marketplace
BUT
the very same politicians have seen to it that we have far less goods and services available......by converting millions of American workers into welfare recipients.....so they are NOT producing anything for the marketplace
plus, the politicians have seen to it that we now also have supply distribution blockages and screw-ups, so that much of the remaining supply cannot even get to market in the first place
thus,
inflation is double=compounding
it is artificial in that it is mostly politician=produced
it is real, however, in that market prices still (as always) reflect supply and demand
get used to it.
today’s prices... (yours may vary somewhat)..
$5.39 for gasoline
$10.17 for a miserable think cafe hamburger
$3 for a cup of coffee
$6.25 for a mocha or latte
$2 for a doughnut
$4000 for rent on a one bedroom apartment
again, prices vary in different locations, but they are most all going UP
little tv dinners which were $1.25 are now $2 (small size)
regular tv dinners which were around $2.99 are running $4.79
symphony tickets have doubled ($250 a pop for just average seats)
we won’t even mention football tickets, ha!
but just parking there is $55 to get your car out of the lot
so you can figure the rest
Yeah, that is exactly what caught my eye, too: “...our baseline view is that most of the inflation will prove temporary”
The fed pumped $5 or $6 trillion into the economy overnight. It’s going to take a LONG time for the inflationary effect of that to get worked off.
The fed can raise interest rates with minimal damage as long as Brandon cuts taxes. Which he’ll never do.
It’s like Los Angeles...”We keep spending more and more on the homeless problem, but every year we have more homeless.”
Great. We’re in luck. /s
Biden will find a way to give us both.
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