Saturday, July 18, 2020

The Fed Is Setting the Stage for a Major Policy Change That Will Skyrocket Inflation

Federal Reserve Board monetary policy meeting

Bloomberg columnist Tim Duy, who is close to Fed Governor Lael Brainard, is out with a new piece where he reports that the Federal Reserve Bank is about to shift policy and allow inflation to "run hot." 

"Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates when setting policy," he writes.

He then tells us Brainard said this week that “with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence.”

He went on (my highlight):
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. Instead, Brainard said the Fed should focus on achieving “employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.” The Fed is going to try to run the economy hot to push down unemployment.
By de-emphasizing the Philips curve, the Fed loses its primary inflation forecasting tool. Instead of an inflation forecast, the Fed will rely on actual inflation outcomes to determine the appropriate time to change policy. Brainard pointed out that “research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.” 
This is type of goose-inflation policy action is the equivalent of the early 20th-century medical practice of prescribing smoking to treat asthma.

As former Fed chairman Paul Volcker pointed out in his memoir, Keeping At It: The Quest for Sound Money and Good Government, concerning the 2% price inflation target:
I puzzle at the rationale. A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.
But Fed thinking has gone beyond this curious target thinking and now allows for higher inflation to "balance out" periods of lower inflation.

With a likely major jump in price inflation around the corner because of the mad printing of trillions of dollars during the COVID-19 panic, the last thing we need is a Fed willing to allow price inflation to run hot. The hotter the price inflation gets, the more difficult it will be to bring it under control. Three-percent inflation is very likely, possibly 5%, but I can't rule out 10% or 13% if the Fed really screws things up given their fatuous thinking about inflation and their over-confidence on how easy it will be to get price inflation under control once it starts to climb at a serious pace.

Hug your gold coins.



  1. Inflation is theft. Thou shalt not steal.

    Stealing 2% per year as a policy goal??? Criminals!

    How many billions is 2% of the value of everyting?

  2. How about silver coins, Robert? I see those as more usable simply because they're more easily divided into smaller amounts (dimes, quarters, etc.)

    1. Silver and 1/10 ounce gold eagles are the way to go.

  3. It's like the Fed is trying to make me rich. Now i just need all these masked up idiots to play their sports again and things will really pick up.

    Hug your 2021-22 options contracts...


  4. I often wonder what will happen once r/wallstreetbets finally learns about gold stocks.

  5. I wonder if anyone has thoughts on deflation or the probability of deflation.

    It's not as if deflation and a deflationary cycle is out of the question, nor is it out of the question the FED is printing money, seemingly recklessly, in order to prevent economic entry into a deflationary cycle.

    When I see they actually wish to stimulate inflation, I see it as the FED's antidote to the FED's bigger fear, deflation. They may sense it.

    The economy has contracted like nobody's business (and almost as if nobody is in business). This is deflationary.

    This is potentially worse than the Great Depression. Workers are unemployed, don't have as much spending money, can't consume even if they want. Therefore demand is down, businesses can't sell what is now their over-supply of product. Demand down, supply up-- prices down. This is deflation.

    If deflation is allowed, the FED can't do anything to control it, I don't think. Obviously the FED wants to control things: that's their power. Also, if asset prices decline, banks in the FED's system will become insolvent and fold. (It is obvious, I think, the FED is printing money and propping up the price of assets, the DOW, and so on. Otherwise they would have collapsed by now. Note the DOW is currently only 10% or so off it's historic high.)

    I watch the precious metals markets fairly closely. These markets are manipulated, too. Manipulated by the banks. I'm not an expert, nor do I claim to know what's going to happen in these markets (or elsewhere). I'm just saying: keep your eyes and ears open and be careful. Especially try to keep up with what the big banks are doing with the supplies of precious metals they've been hoarding. If they begin selling, sell.