Suppose you have an uneasy feeling in your stomach whenever someone mentions the economy. It may be because of the tremendous disconnect between what we hear from Washington and our reality.
This week that disconnect will be on full display as the Federal Reserve meets for its annual confab in Jackson Hole, Wyoming. The Conference is designed to bring political and financial leaders together with the Fed officials and discuss the current state of the nation’s finances. An opportunity for the nation’s central bankers to share their vision for the economy.
The highlight of this year’s meeting will come Friday at 10 am Easter Time, when Chairman of the Federal Reserve Jerome Powell will address the Conference and, via the Fed’s online connection, address the nation.
For Powell, this will be perhaps the essential speech for the Chairman this year, as it will be his task to bring us up to speed on the Fed’s next direction in monetary policy.
And all of us are waiting with great anticipation for his pronouncement.
And for those familiar with the lawyer turned Fed Chairman, we can anticipate much of what will likely be said. On inflation rates, the Chairman will indicate that they will do “whatever” necessary to bring it under control. On interest rates, they’ll raise them as far as needed to get inflation back to target. Essentially he will echo what we heard from Fed Governors Kashkari, Bullard, and Daly last week.
And, of course, Powell will tell us that the Fed will promote full employment as is their other principal mandate.
“Don’t worry. We’ve got this.” in other words, Powell will claim that the Fed has everything under control.
And I suspect that many listening will go away satisfied — content in believing that the Federal Reserve has control of all things monetary.
Only to wake up the following day with that uneasy feeling that perhaps everything isn’t as Powell said. That growl in the stomach, again. And looking at your favorite financial website may tell you that conditions are worsening.
What if it turns out that the Federal Reserve is currently operating outside of its own projected goals and objectives? So much so that any current assessment by the Fed has to be challenged.
The Fed does have a long-range planning document. A document that they prepare and publish. Called: the “Statement on Longer-Run Goals and Monetary Policy Strategy.”
The Statement is the fundamental document providing the current state of the economy and the Fed’s projected monetary policy. It is from this document, I presume, that Powell will draw much of Friday’s speech.
But it doesn’t look like that’s the case.
The Fed initially prepared the Statement in January of 2012. A time when inflation was well under control. In fact, by all accounts, the Fed seemed more concerned back then about raising inflation (avoiding deflation).
Just eight months ago, in January of this year (2022), the Fed reaffirmed this Statement. And specifically addressing monetary policy, they make one of the most astonishing statements to everyone except a true monetarist.
“The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation.”
As I say, a specific school of economic thought will completely agree with this Statement. And everyone within a hundred miles of the University of Chicago will think this is perfectly understandable.
The Fed’s target was always to manage inflation to 2%. Something that they believe they can do. The Fed calls this process the “Fed’s Bullseye.” (see image.)
The problem is that it’s not working. When the Fed reaffirmed this Statement in January, real-world inflation was already at 3 3/4%, well above their 2% target. And, as we all know, inflation was headed to the current 8 1/2%. So, if, as they say, the Fed can “determine” inflation over the long run, something must have gone wrong.
A common-sense review of the current data reveals that nearly half of today’s inflation comes from the oil price increase. It is escalating energy costs that are the principal driver of inflation.
And unfortunately, this increasing inflation is becoming endemic within the entire economy. We are beginning to see severe inflation in food prices and other areas.
At its heart, this bout of inflation is principally due to shortage. Money printing (a stimulus check for everyone) has exacerbated the problem. But that was a $5 trillion mistake we cannot take back now.
The most significant step we could take now would be to increase physical supply. Mainly supply of oil and gas. As I’ve pointed out before, simply growing the gasoline supply would bring the price back to where it was. And would cut inflation to less than half its current rate.
So, do I think Chairman Powell will address the supply issue and the actual driver of inflation? Of course not.
Powell is like the slick salesman who sells a monetary policy, the “cure to all the nation’s woes.” He’s not going to suggest that there might be another answer to inflation. Nor is he going to point to other policy failures.
Instead, he’s likely to point to the Fed’s Bullseye and claim that 2% inflation is right around the corner. After all, the Fed believes it can “set the longer-run goal for inflation,” and it can hit the “bullseye.”
We had several significant economic reports last week, centered in the Real Estate and Retail Sales areas. Unfortunately, most of these reports were down — lending credence to the growing consensus that the economy is weakening. Of the nine major reports issues, seven were lower, including the very important reports on Retail Sales, Existing Home Sales, and the dramatic drop in New York State Manufacturing.
Against this background, the US Federal Reserve is seen as continuing its monetary tightening policy. And we’ll find out more about this as the Fed meets in Jackson Hole, Wyoming, later this week.
This sets up the very interesting clash in monetary policy we are beginning to see between the US and China. While the Federal Reserve is busy raising interest rates and entering into Quantitative Tightening, China is going in the opposite direction. China lowered interest rates, both short and medium term, over the weekend, as well as beginning a program of direct monetary pumping.
I expect that Fed Chairman Powell will indicate the Fed will do just the opposite when he speaks on Friday.
The only major economic report on the calendar today is the Chicago Fed’s National Activity index. This relatively new index for the Fed is designed to measure the nation’s overall vibrancy. For the last two months, this index has been in slight contraction. It indicates a weakening economy.
In earnings reports this morning, it’s a good day for Karaoke, as Chinese company Singing Machine is up big on their results. Major US companies reporting today include cyber security company Palo Alto Networks, upscale retailer Nordstrom’s, and video conferencing company Zoom Video, all reporting after the market closes.
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