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Pro Perspectives 8/2/21

August 2, 2021

We heard from the Fed last week, and the tune has changed

For the better part of this year, the Fed has attempted to convince the world that increasing the money supply by more than 30% over the past year, is not inflationary.

The rising prices we're seeing everyday, Powell and company, have claimed are simply the result of "base effects" and "bottlenecks."  They have said that price data only looks high because it's measured against a very low base of last year, when the economy was virtually shut down ("base effects").  And they have blamed higher prices on supply chain "bottlenecks" — which will ultimately normalize.

With the above in mind, these inflationary effects, they have claimed, are "transitory." 

 
This term started showing up in the January Fed press conference, and has since been the drumbeat from the Fed.  

Keep in mind, the term transitory was introduced AFTER about $3 trillion of fiscal stimulus was already approved and working through the economy, to such a degree that the economy was already nearing a full V-shaped recovery (by late January) — and projected by the CBO (Congressional Budget Office) to grow at a 3.7% annualized rate (hotter than pre-pandemic growth), with an unemployment rate falling to 5.3% – about right at the average unemployment rate of the past 50 years.

But in January, the new Biden administration had a huge and very expensive agenda to roll out.  It included an immediate $1.9 trillion massive spend (quickly approved).  Conveniently, the politicians on Capitol Hill justified it by citing the Fed's view that inflation wasn't a threat.   And of course, this term transitory has continued to be used by the Fed, as the Biden administration has lined up another $4.5 trillion in deficit spending (all but a done deal).

So, only now does the Fed (Powell) start to move the goal posts.  In last week's post FOMC press conference, Powell stumbled through a definition of transitory, and suggested that it means prices just won't rise at the same rate as we've seen (lower rate of change).  So, yes, he admits there is massive inflation.  But he says, the peak rate-of-change just won’t be persistent.  

 
If history is our guide, it won’t persist, because the Fed will ultimately kill it.  And when they kill it, they will kill the economy.         

It seems clear that the non-political line has been well crossed by the Fed, and they have since become an instrument of the Biden administration, to facilitate the funding of the massive economic and social change agenda.

 
As we discussed in my last note, economic declines are typically triggered by the Fed.  When the Fed finally, 1) acknowledges the hot inflation, 2) stops fueling it, 3) starts chasing it, and 4) ultimately kills it with higher interest rates, then the economic damage will come.  I think they've just acknowledged hot inflation (stage 1).  With the $4.5 trillion on the way through Congress, the next stage of withdrawing the fuel looks to be near.
 
Best,
Bryan  

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