Top CFR Economist Warns Inflation Could Return Faster Than Federal Reserve Thinks

 Top Council on Foreign Relations economist Benn Steil and his associate Benjamin Della Rocca write:

[S]ince June, as QE continued to balloon the Fed’s balance sheet, bank excess reserves have turned sharply downward. In consequence...the gap between the Fed’s balance sheet and bank excess reserves, which had closely tracked inflation throughout the post-crisis era, has hit new highs. If this trend persists, inflation should head upward in tandem...

When, then, can we expect inflation to hit the Fed’s Holy Grail of 2 percent? Well, we know that when our balance-sheet-to-reserves gap measure began rising in 2010 it took eight months for inflation to rise one percentage point from the time it subsequently bottomed out. If inflation should rebound at the same pace now, we are looking at 2 percent Core PCE inflation, the Fed’s preferred measure, in February 2021.

The Federal Reserve on the other hand doesn't see price inflation at 2 percent until 2023.

My thinking, as outlined in the EPJ Daily Alert, is in line with that of Steil and Della Rocca.

The Fed is thinking at a remarkably shallow level that reflects a poor understanding of how price inflation develops. They are just projecting the trends in growth of price inflation in recent past years into the future.

Steil and Della Rocca point out, as I do, that newly Fed created funds are currently getting pushed into the system. This is different from the money pump following the September 2008 panic. At that time, much of the Fed money pump ended up as excess reserves, not this time.

There is enormous upward pressure on prices right now that will continue into the foreseeable future.

Hug your gold coins.

-RW