Before the Russian War, we published three commentaries on inflation and the Fed. Here are the links:
“Inflation!” https://www.cumber.com/market-commentary/inflation-1, November 10, 2021
“Inflation Running Hot,” https://www.cumber.com/market-commentary/inflation-running-hot, February 11, 2022
“More on CPI Inflation,” https://www.cumber.com/market-commentary/more-cpi-inflation, February 15, 2022
A number of readers contributed thoughtful responses to piece, “More on CPI Inflation,” and we are sharing some of them below. Readers also responded to a segment I did on Yahoo Finance on Feb. 14: “What to expect as the Fed gets ready to raise interest rates,” https://ca.finance.yahoo.com/video/expect-fed-gets-ready-raise-155833436.html.
Former Philly Fed President Charles Plosser wrote:
It would be more revealing to talk about real interest rates. Adjusting for inflation the real rate has not been flat at zero. The real rate has become more and more negative by a lot in the last year. Why does the Fed tolerate this further easing of policy in the light of the damaging effects of inflation and the strength of the economy? They have tolerated this for more than a year. That low real rate continues to act to strengthen nominal aggregate demand which stimulates more inflation and higher expectations. This is one reason why I have been arguing that people should quit talking about the price of lumber and autos and focus on misplaced policy. The Fed is already behind the curve and the debate and the appropriate speed of action is now reflecting its failure to have started gradual tightening a long time ago. Now they can really cause turbulence and risk an 80s type recession, though I hope not. They have returned to the stop-go policies of old.
Danielle DiMartino Booth tweeted:
@DavidKotokGIC on dangers of dreaded Quantitative Tightening COMBINED w/rate hikes (Google: Federal Reserve double tightening 2008). The analogy: Having a patient undergo two radically different treatments at once. If there’s a severe reaction, which treatment caused it?
(https://twitter.com/DiMartinoBooth/status/1493611317093089288)
Brian Barnier advised:
FYI, use caution with Dallas or Cleveland trimmed means. Fraught with statistical problems. As I wrote several years ago https://feddashboard.com/how-the-feds-2-target-created-their-inflation-trap-and-hurt-our-growth/. My grad students a few years ago did a project with kind support from Dallas Fed on “what trimmed mean trims out.”
Then he added:
Asset managers need to watch central banks – no matter how many errors central bankers make – because assets managers need to live with the errors. That central bankers can make so many errors is another issue due to specific causes.
Fred Feldkamp wrote:
An economist friend circulated a good brief summary of inflation to a group of us and I responded with this (emphasis added):
For what it’s worth, I find the following FRBNY report and recent Survey Research Center data on consumer expectations BOTH (1) very valuable and (2) exceptionally confusing for “resolution” of current inflation trends.
https://www.newyorkfed.org/newsevents/news/research/2022/20220214
My “gang” of market analysis nerds has a sort of “pool” going. Is what we see today like (a) 1994 or (b) 1979? I think we pretty much think 1994, but nobody wants to “predict” because the answer “depends” on actions and reactions among everyone in the world. I don’t know a data base of experience with deadly global pandemics that trigger massive liquidity responses that abruptly end with employment figures showing record jobs and record reluctance to work caused by fear of congregating combined with accelerating wages. If you know comparables, please let me know.
In 1994, Jack Welch was THE big loser. GE owned Kidder Peabody and did not understand it had stupidly lent gobs of money to speculating customers that bought mega-billions of “under 1-yr” instruments that converted (almost overnight) into “over 20-yr” instruments when Alan Greenspan raised Fed Funds rates 6 times in a year. It drove GE into a deep hole. Everyone overreacted and caused the SEC to enact “cures” 4 years later that proved far, far worse than the 1994 disease. GE never really recovered.
All I hope for now is “calm reflection” and no “overreaction.”
Paul wrote:
Agree with your answers, David, and I hope the Fed does, too.
The issue of policy mistakes is important. The Fed surely will (at least internally) have to decide which mistake they more want to avoid: too much inflation or too little growth. Given the times we are in, and the (likely) new Board members, I’d say they will minimize growth risks and accept some overage on inflation.
Frank M. wrote:
Watched the Yahoo clip (you sound and look well, glad to see and hear that). In Seattle, Ivar's (restaurant famous for clam chowder and salmon) used to use the slogan "Keep Clam." I think they would have supported your “calm down” completely!
The Wealth Of Nations tweeted:
Replying to @GaryKaltbaum @DiMartinoBooth and @DavidKotokGIC
Well everyone was screaming back in Dec 2018 – too many hikes! too many hikes! no junk has been issued in 40 days... help! help!
Nobody has the guts to see debt deflation – it’s all talk talk talk
(https://twitter.com/nationswealth/status/1493616412669231107?s=11)
Replying to @DLCanale1 @GaryKaltbaum @DiMartinoBooth @DavidKotokGIC
Hikes are always too many with more than $300 trillions of global debt the quest is for neg real rates so the govts can inflate away the burden. Hence, nobody is saving anything & rich people get richer by leveraging assets as much as they can to buy more assets & leverage more
(https://twitter.com/nationswealth/status/1493652282457538561?s=11)
Frank F. wrote:
I’m no monetary expert. Not my area.
Seems that if the measured response is to first conclude that “We don’t know” and second to apply a slow and steady approach to raising rates (stemming the inflationary tide) then it begs the question: What were we thinking when we (two administrations and the Fed) flooded the system with easy credit, PPP loans and recovery rebate check? I get that economics is a fairly complex system, proven of late by the fact that none of these organizations tasked with mandates to protect against inflation etc were able to anticipate the results of their action.
You’re a fan of Lacy Hunt. Doesn’t anyone pay any attention to his warnings? You might argue that the bailouts from 2008 into the pandemic were necessary to “keep the lights on”. Lacy would argue that they were near sighted and working contrary to creative destruction. We, societally, could easily have supported those individuals that were in trouble. By supporting near everyone and especially failing companies, we significantly supported businesses that maybe should have failed, while stoking inflation that will now hurt predominantly the most needy groups in our society.
My colleague Bob Eisenbeis wrote:
Good one, David. Right now it doesn’t matter what measure one uses, they are all too high. Some are calling for a bigger up-front hike, more like 50 bp rather than 25, and this includes Bullard. My view is this would be a sign of panic and would likely shock markets.
Another David wrote:
Unless healing supply chains bring inflation down sufficiently (not just bring it down), then if the Fed really tries to reach its long-term goal of 2.0 percent inflation (core PCE), it will have to tighten by enough to cause a recession. That's clearly what history shows, as the Fed can't fine-tune its policies well enough to tighten just enough to bring inflation down without causing a downturn. The thing that could change this is some exogenous positive supply shock (as we saw in the mid-1990s) such as a surge in productivity growth. We'd love for that to happen, but I wouldn't count on it. Perhaps the impact of healing supply chains will be sufficient, but I doubt it. The alternative is that the Fed avoids a downturn, but only by allowing inflation to remain above its goal.
We value our readers’ thoughtful engagement. For further insight on the Fed’s current policy struggle, we recommend this commentary from Money and Banking: “Fed Monetary Policy in Crisis,” https://www.moneyandbanking.com/commentary/2022/2/12/fed-monetary-policy-in-crisis.
David R. Kotok
Chairman & Chief Investment Officer
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