May 5, 2022

The Deliberative Fed. Plus Stunning News From China And Turkey.

Well, you can't say you didn't see that coming. For seeming months now the Federal Reserve has debated raising interest rates. Debating just how far they should go in fighting inflation.

And that's the real problem with our economy. A runaway raging wildfire of inflation. That threatens the livelihood of nearly everyone in the nation. It's getting to the point, that no matter how much income you have, it seems to be falling behind this new cost of living escalation.

When did you realize that inflation was out of control?

For many, the early signs came in late 2020, when prices seemed to rise for no reason at all. But by that fateful February of last year, 15 months ago, it became clear that we were in the middle of the conflagration.

From February till March prices jumped by one full percentage point. From 1.6% inflation to 2.6% inflation. All that in a single month.  Something we hadn't seen in over 40 years.

And suddenly we were engulfed. What seemed under control inflation at the beginning of 2021, doubled by April of that year. And has doubled again currently.

What began as inflation at less than 1 1/2% is now inflation of over 8 1/2% less than a year and a half later.

And as anyone who has ever fought a fire, or dealt with a crisis will tell you the time to act is immediate. Right at the beginning.

But as you and I know, at least when it comes to monetary policy, that's not how Washington works.

Washington, after all, is a collegial place. Where they address each other as “my esteemed colleague” or the gentle member from the great state of so and so. You know the drill.

It's a place where first you build consensus, then you take action.

Apparently, that's what the Fed has been doing over these many months: building consensus. Granted the Fed did raise rates in March. But that tepid move was hardly commensurate with the scope and magnitude of the inflation we were going through.

It was yesterday's rate hike that was the first significant effort at changing the vector of this inflation fire.

And it is this slow to move, deliberate nature of the Fed, which comes into question during a time when our economy can be buffeted on a weekly if not monthly basis.

The time to act was clearly back in that February March 2021 time frame. If not act, then at least become aware that we had a major problem on our hands.

Yet here we are a year later, and only now is the Fed taking serious action.

Some of this is the result of Fed tradition. In the 8 months following that inflation jumped. And a time when inflation was continuing to rise vertically. The Fed, by tradition only meets 6 times more last year.

That's right the Fed Open Market Committee, the principal rate setter for the fed, only meets 10 times per year.

Heaven forbid, that the Fed should call a special meeting.  Or ask that members met over Skype or some other platform. No, I suppose that wouldn't be seemly.

Better to let inflation really gain momentum.

Which, of course, is just what has happened.

In a world with instant information. One in which financial conditions can change with the wind.

Yesterday, we finally had this Fed reacting to conditions that literally began more than a year old.

This is what happens when you have a deliberative Fed in a real-time economy.

David

PS 

Stunning News From Turkey And China.

Leading off today's global economic picture: a report that I think you're going to find as hard to believe as I did.

In this modern economic world, I didn't think we would ever see inflation at the rates that we're seeing right now. The assumption has been that today's Central Bankers had the tools at hand, to prevent true runaway inflation.

But, most, unfortunately, we were wrong. The coordinated effort of the monetary authorities is doing little to stop inflation in certain select countries.

Turkey is now the world champion in run away, out of control inflation. A couple of hours ago, Turkey announced that its current inflation rate is 69.97%.

Let's just call it 70% inflation in Turkey on an annual basis. With this report, Turkey left Argentina behind in the dust. The Argentine inflation rate is a “mere”/s 50% plus.

But this level of inflation is just breathtaking. It is a level at which economies collapse, and countries fail.

I know that Erdogan is a powerful dictator, with what seems to be complete control over his country. But at this level of inflation, one has to wonder how long before we see a complete revolt in Turkey.

In another stunning development overnight, we had China's latest report on their Purchasing Managers. Just yesterday we were commenting on how Purchasing Managers throughout Europe were pointing to better times ahead. And this morning we can add India to that list of positive indications from Purchasing.

But China, China stands on the other side of that Purchasing Managers” Wall. China's composite PMI fell to a mere 37.2 on a 100-point scale. This says that the Chinese economy is beginning to contract.

A result no doubt of those draconian lockdowns that the Chinese Authorities have put in effect. It appears from this latest PMI report, that China's economy is on the verge of recession.

But Turkey and China are not the only countries to get a warning sign today. If Analysts are correct in their estimate, the US will also see a dramatic drop in Productivity.

Now Productivity is one of the key pillars upon which a well-functioning and highly profitable economy depend.

As workers become more efficient, it drives higher and higher levels of profit. The US dominance in technology and engineering has historically driven economic progress here at home.

But today the estimate is that Productivity will show a decline from a 6% plus record in the last quarter of 2021. To a 5% decline in the first quarter of this year.

If that turn's out to be the case, it's a nearly 12% drop in this key indicator. One of the worst I ever remember.