Is the Federal Reserve easing off the accelerator on its inflation fight?
\nThe answer depends on whether you believe your eyes or your ears.
\nOur eyes tell us the Fed is slowing down on rate hikes.
\nAfter easing back from a 75 basis point hike in November to a 50 basis point hike in December, the Federal Open Market Committee (FOMC) delivered an even smaller 25 basis point hike at its February meeting. With the most recent rate increase, the target range for the federal funds rate is between 4.5 and 4.75%.
\nA quarter-percent rate hike was widely anticipated. The mainstream narrative is that inflation has peaked and the central bank is now easing its foot off the accelerator.
\nBut if our eyes tell us the Fed is winding down the inflation fight, the messaging coming from the central bank says the opposite. The FOMC statement said, \u201cInflation has eased somewhat but remains elevated,\u201d and it signaled additional rate hikes in the future.
\nThe Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.\u201d
\nAs it did in the last two meetings, the FOMC left wiggle room to pivot, saying the committee will continue to take into account \u201ccumulative tightening\u201d and \u201cthe lags with which monetary policy affects economic activity and inflation\u201d as it makes future decisions.
\nDuring his press conference, Powell repeatedly said \u201cthe job is not done,\u201d and emphasized that \u201cIt would be very premature to declare victory, or to think that we\u2019ve really got this.\u201d He indicated that the central bank could raise rates a couple more times.
\nWe\u2019ve raised rates four and a half percentage points, and we\u2019re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive. Why do we think that\u2019s probably necessary? We think because inflation is still running very hot.\u201d
\nAnswering another question, Powell said, \u201cIt\u2019s our judgment that we\u2019re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes.\u201d
\nOn the other hand, Powell also gave himself some wiggle room, saying that he does see inflation easing.
\nWe can now say I think for the first time that the disinflationary process has started. We can see that and we see it really in goods prices so far.\u201d
\nPowell continues to insist there is a path for the central bank to bring price inflation down to 2% without causing a significant economic slowdown. He brought up the \u201cstrong\u201d labor market several times during his press conference.
\nReaction
\nThe markets appear to believe what they\u2019re seeing, not what they\u2019re hearing.
\nDespite what Powell actually said, the mainstream seemed to read between the lines and initially took the outcome of the FOMC meeting as confirmation that the tightening cycle is nearly over.
\nStocks see-sawed after the announcement. The Dow initially sold off before swinging some 170 points to the upside after Powell\u2019s press conference ended. The Dow slid into the close, finishing up 8 points. But the NASDAQ with its more speculative stocks closed up 2% on the day, and the S&P 500 finished up just over 1%.
\nGold surged by over $20 and pushed over $1,950 an ounce. The dollar fell, along with bond yields.
\nAll of this indicates that the initial market take was that the Fed is nearly finished raising rates.
\nAllianz Investment Management senior investment strategist Charlie Ripley told CNBC that the messaging leaned \u201cslightly dovish,\u201d adding that a lack of clarity on future interest rate moves signals the Fed is nearing the end of its rate tightening cycle
\nThe Fed is essentially speaking out of both sides of the mouth as they signaled further increases are appropriate, but also acknowledged they will consider the cumulative amount of tightening in future policy decisions.\u201d
\nIn an interview on Fox Business, Peter Schiff said he heard a lot of economic ignorance coming out of Powell\u2019s mouth. He said the \u201cdisinflation\u201d that Powell mentions is \u201ctransitory.\u201d
\nSchiff zeroed in on a comment Powell made claiming consumer expectations cause inflation.
\n\u201cInflation is caused by the government,\u201d he said. \u201cIt\u2019s caused by the Federal Reserve printing money and Congress spending it.\u201d
\nSchiff said even if the Fed delivers a couple more 25 basis point hikes, it\u2019s still not enough to slay inflation. He noted that even with the rate hikes, Americans continue to borrow money in order to keep up spending and saving has fallen into the basement.
\nPeter said he believes we are heading toward a major economic downturn, but even that won\u2019t slay the inflation dragon.
\nLooking Ahead
\nNo matter what\u2019s going on in the Fed members\u2019 heads, right now, I think the inflation fight will end the moment something breaks in the economy.
\nAnd I\u2019m convinced something will break in the economy.
\nPowell insists there is a path forward that brings inflation down while avoiding a recession. I think that\u2019s wishful thinking or bureaucratic spin. I think it\u2019s a virtual certainty that the economy will spiral into a downturn. And I don\u2019t think it will be short and shallow. I think it will be deep and prolonged.
\nMy pessimism is rooted in the fact that the US economy is addicted to easy money. It is addicted to artificially low interest rates and quantitative easing. You can\u2019t take an addict\u2019s drug away without sending him into withdrawal. The economy can only limp along so long with tighter monetary policy.
\nInterest rates haven\u2019t been this high since 2007. At that point, the Fed was cutting rates due to the housing bust. The economy couldn\u2019t handle interest rates that high.
\nPowell and Company have backed themselves into a corner. They just don\u2019t know it yet (or more likely, they haven\u2019t admitted it).<\/p>\n
Oilprice<\/p>\n
Tags\uff1aInflation<\/p>\n","protected":false},"excerpt":{"rendered":"
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