At the conclusion of the Fed’s last policy meeting, Federal Reserve Chair Jerome Powell was pleased to announce that “for the first time, the disinflationary process has started.”
Uh, not so fast there, Mr. Chairman! You don’t want to make the mistake that Arthur Burns made when he had your job.
It was just weeks ago that we cautioned against declaring victory over inflation too soon. That’s what the authorities did in the Stagflation Decade—the 1970s—only to find they had jumped the gun.
And sure enough, we learned last Friday that the Fed’s preferred inflation gauge has stopped falling and has ticked back up.
In his State of the Union address, President Joe Biden used the same talking points as Powell. “Here at home, inflation is coming down,” Biden said. “Inflation has fallen every month for the last six months.”
Oops! Spoke too soon! Because now we learn that on a month-to-month basis, the Personal Consumption Expenditures (PCE) price index added 0.6% in January. That’s up from 0.4% and 0.3% in the previous two months.
So-called “core” inflation, which doesn’t include food and energy, also climbed 0.6% for the month.
The Fed and Inflation
What is one to make of all this? For the answer, we turn to the man who ran the Office of Management and Budget for President Reagan. David Stockman explains it this way:
The Fed claims to be steering the economy based on the incoming data, but there are just two things wrong with that claim:
- The steering part…
- The incoming data part….
The deficiency of the “steering” part goes back to Professor Milton Friedman himself. In his famous quote about the monetary policy lag, he more or less conceded that central bankers would forever get it wrong because they wouldn’t really know if they did too much for too long or if they stopped with too little too soon, or, actually, if they had chosen any other erroneous combination of amount and time.
We’ll put it a little more simply: The Fed drives looking in the rear-view mirror. That’s what it did in the 1970s, too. That’s why gold was the place to be and why the latest inflation news always seems to catch the authorities by surprise.
Fed officials keep tapping on the brakes, but inflation is still three or four times the Fed’s target rate.
If they were looking down the road, they are unlikely to see anything ahead but overspending and compounding debt—just the thing that could fuel even more inflation. That alone is a good reason to be pessimistic, get out of the way, and own gold because something could break.
A Financial Vicious Cycle
We are caught in a trap, says Heritage Foundation senior fellow Stephen Moore: “We now find ourselves in the throes of a financial vicious cycle. The more Biden spends and borrows, the more inflation goes up, which in turn causes interest rates to rise, which requires more and more spending that is simply financing the cost of the $32 trillion debt.”
Stated differently, here is the Fed’s dilemma. It can’t slam on the brakes without tanking stock, bond, and real estate markets. And when that happens, they will have to step on the accelerator again. “Floor it!” will be the order of the day because that is the only policy alternative they will have.
Monetary policy—the Fed’s interest rate manipulations and money printing—and fiscal policy—Washington’s spending and debt—are like a house divided that cannot stand. The Fed’s interest rate hikes and bond liquidations are at odds with Washington’s uncorralled spending and the rising interest rates it must pay on the rising national debt. The policies are incompatible. Something must break. We think you will be glad to own gold and silver when that happens.
“Markets are dreaming if they actually believe inflation will soothingly return to the previous cycle’s relative quiescence,” writes Doug Noland at Credit Bubble Bulletin. “The ongoing toll on society will be tragic–the triple trouble of destabilizing inflation, bursting bubbles, and disorienting monetary disorder. And since this historic credit bubble and inflations have been global phenomena, geopolitical hardship could prove even more consequential.”
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