Sunday, March 27, 2016

The Fed Is Going to Let Price Inflation Run Hot

Mickey Levy, Chief Economist for the Americas and Asia, Berenberg Capital Markets, LLC and member of the Shadow Open Market Committee, is correct when he writes:
The Fed cannot continue to tout that its policy is “data dependent” when recent data reflect that the Fed has effectively achieved its dual mandate, yet it doesn’t raise rates and indicates sustained extremely easy monetary policy.
With the modification of its dual mandate, this very activist Fed obviously is pursuing something more. It is basically saying that it aims to overheat the economy and that it will tolerate inflation above 2%, with the goal of further labor market improvement. Improvement includes both broader measures of unemployment—such as U-6, which includes workers that are designated as “marginally attached to the labor force” and “part-time for economic reasons”—and wage gains. In doing so, the Fed is understating the distortions it is generating and the higher risks of financial instability.

The Fed is nowhere near ready to raise interest rates high enough to fight off the developing accelerating price inflation. This will result in a series of interest rate hikes to fight climbing inflation that will not be enough and will allow price inflation to get out of control  The Fed inflation fight will be too little too late. The inflation will keep on climbing and the capital-consumption structure of the economy will continue to be distorted.

It will not end well. And, interest rates will be much higher when it does end. Austrian-lites who think the Fed won't be able to raise interest rates have no idea as to what is developing.



  1. If interest rates rise, there is not enough revenue to pay interest on the debt. How are they going to handle that?

  2. The view from the Cheap Seats:

    Going back to Bernanke. the Fed believed that a variation of Friedmanite Monetarism - backing up E-Trucks to the back of "the Banks" computers would halt problems on the Little Peoples side. No Bank Runs here! "We're building up Reserves to take care of ANY Problem!!
    Short Term (Friedman) became Long Term and now the System is awash...Wayadammit...ummm...We can't..uhhh..."Drain Liquidity" and uhhh...

    As M1 and M2 come crashing to Zero, the Fed has to - HAS TO - revert to Keynestard Programs.

    Bernanke to Friedman and Schwartz: "You were right and we'll never do it again". Yes. You will.


  3. I find it humorous you say austrian-lites have no idea what is developing. You have said for years rates will climb and that inflation is "about to get hot", yes we have had stable/falling long term rates over the same time period. Yes, you will eventually be right and rates will climb as inflation gets out of control, but you are starting to sound like the boy who cried wolf, and at the same time calling out others for their(for the time being?) wrong calls. It reeks of unprofessionalism.

    1. Great theory accept for the fact that the 10-year bottomed in Jan 2015 and the 3-month bottomed in Oct. 2015. And core price inflation is above the Fed's target at 2.3% and wait until next month when climbing energy prices are factored into the index.

      And what exactly is professional about forecasting that the Fed is going to reverse the December rate hike when that is not going to happen, regardless of whether you cry wolf, Austrian-lite or Paul Krugman.