The US economy is a story of acute divergences, making it increasingly hard for the Fed to deliver on its mandate of 2% inflation rate. It's going to be a bumpy ride.
What a piece of excellent research, Amrita! Wow! There is so much to unpack.
1) While gold has outperformed major fiat currencies, let's not forget that gold has been a lousy investment, a lousy inflation protector, a lousy crash protector, and a lousy diversifier for both stocks and bonds over the past 40 years. The only time it has been a great investment is during periods of expected economic slowdown with the anticipation of a soft landing, which seems to be happening now. During such times, gold has delivered double-digit returns almost every time.
2) I’m surprised I don’t see health insurance among the inflation drivers, unless the BLS combined it with medical expenses. Health insurance premiums have been growing at around 4%, and with my luck, my personal insurance premiums have been growing in the 10-12% range.
3) I’m also surprised that education prices grew at only 2.4%. I suspect the BLS may have combined subsidized and non-subsidized education, which is incorrect because I believe only the top-level non-subsidized prices should be reported, or at least reported separately.
I don't get why the "national deficit" matters. It never seems to matter when bailing out banks or giving the pentagon 1T a year. It only matters when it comes to paying for pensions or health care when we "can't afford" it.
I would imagine that the current administrations policies of shoveling cash into war bonfires, student loan and illegal alien entitlements, and inane green energy mandates have blunted the Fed's efforts to control inflation?
Fascinating breakdown of the complexities facing the Fed right now! Your clear analysis really brings the various economic signals and policy options into perspective. Curious to see how this unfolds—what do you think will be the most likely next move by the Fed in the coming months?
Funny. The last section is the important one. There are two problems. 1) McDonald's raised its margins 50% over the last 5 years. That has nothing to do with costs or the Fed or the deficit. Wages make up about 12% of McD's costs. 2) Taxes are too low on corportations and the rich. The Federal government needs to spend more on everything but defense and profitable companies need to pay for it. Interest rates neither pay down the deficit nor lower the price of a hamburger. The Fed is like a kid in his high chair felling in control, spinning the little steering wheel left and right as nothing happens. Instead of thinking, "I had better try breaking up monopolies, higher taxes or price controls", he spins harder. Modern Economists don't think.
Eeny, meeny, miny, mow... 🤔 it will be interesting to see where they go with this! Thank you I am read it for another very well curated financial report! I always enjoy your writing, you take boring and make it interesting! Thank you! 🤗♥️
Fantastic post Amrita. The recent CPI has come as a shocker and the Feds are dealing with a tense situation here. Add to that geopolitical tensions. If the fiscal deficit widens, the government will have no choice but to print more money. Inflation and interest rates will go for a toss then.
Every move the Fed makes now can have a butterfly effect. Let's hope it turns out good.
Interestingly, the US stock market is solid. It's grown on quite a few companies beyond NVidia. I'm holding my stocks and ETFs, all US equities. However, I can see now that slowly building a position in precious metals was a good decision in 2023-24. That graph showing dollar vs. gold says it all.
Powell surely knows that 2% is mythical, but he knows he doesn't have to be the one admitting this. He'll leave that to a future Chair. He wants to be remembered as the guy who at least tried to hold the line.
With long-term TIP break even only around 2.5%, "the market" is not voicing a big feat either. Once that stays above 3% for a year and bounces toward 4% rather than toward 2%, the next Chair may acknowledge we'll be higher forever
Great and thought provoking post! Once again I point to housing and the CRE market being in a state of “cardiac arrest” - between a high Fed interest rate crippling mortgage borrowing and PE and ’hedgies’ getting into the landlord business when they are ill-equipped to rehab or maintain their inventory to make it available for sale or rent. Call me a dreamer, but a rentier tax with teeth and a hefty insurance surcharge on unoccupied/ unsalable RE ought to bring relief for those that are desperate for affordable housing. While we’re at it, let’s not forget that the Fed was created 100 years ago by bankers FOR bankers. High time we returned control of the currency to the US Treasury with stiffer controls on fractional reserve lending and return to Glass-Steagall separations to protect Consumer banking and the FDIC. (‘rant off’ 🤨)
The correct move is to "do nothing" and the way to do that iis to reduce the EFFR by a measly 25 bp. Indeed it should probably have done that earlier, in December. An EFFR of 5.00% is still sufficient to keep downward pressure on the PCE .
What a piece of excellent research, Amrita! Wow! There is so much to unpack.
1) While gold has outperformed major fiat currencies, let's not forget that gold has been a lousy investment, a lousy inflation protector, a lousy crash protector, and a lousy diversifier for both stocks and bonds over the past 40 years. The only time it has been a great investment is during periods of expected economic slowdown with the anticipation of a soft landing, which seems to be happening now. During such times, gold has delivered double-digit returns almost every time.
2) I’m surprised I don’t see health insurance among the inflation drivers, unless the BLS combined it with medical expenses. Health insurance premiums have been growing at around 4%, and with my luck, my personal insurance premiums have been growing in the 10-12% range.
3) I’m also surprised that education prices grew at only 2.4%. I suspect the BLS may have combined subsidized and non-subsidized education, which is incorrect because I believe only the top-level non-subsidized prices should be reported, or at least reported separately.
I don't get why the "national deficit" matters. It never seems to matter when bailing out banks or giving the pentagon 1T a year. It only matters when it comes to paying for pensions or health care when we "can't afford" it.
I would imagine that the current administrations policies of shoveling cash into war bonfires, student loan and illegal alien entitlements, and inane green energy mandates have blunted the Fed's efforts to control inflation?
Fascinating breakdown of the complexities facing the Fed right now! Your clear analysis really brings the various economic signals and policy options into perspective. Curious to see how this unfolds—what do you think will be the most likely next move by the Fed in the coming months?
Funny. The last section is the important one. There are two problems. 1) McDonald's raised its margins 50% over the last 5 years. That has nothing to do with costs or the Fed or the deficit. Wages make up about 12% of McD's costs. 2) Taxes are too low on corportations and the rich. The Federal government needs to spend more on everything but defense and profitable companies need to pay for it. Interest rates neither pay down the deficit nor lower the price of a hamburger. The Fed is like a kid in his high chair felling in control, spinning the little steering wheel left and right as nothing happens. Instead of thinking, "I had better try breaking up monopolies, higher taxes or price controls", he spins harder. Modern Economists don't think.
Does anybody really believe the "official" inflation rate?
The Dollar Tree raised the price of their items from $1.00 to $1.25. Also, some of their products were reduced in size.
John Williams of Shadowstats.com calculates inflation based on older methods. https://www.shadowstats.com/alternate_data/inflation-charts
Well written, thoughtful piece. Thanks!
Eeny, meeny, miny, mow... 🤔 it will be interesting to see where they go with this! Thank you I am read it for another very well curated financial report! I always enjoy your writing, you take boring and make it interesting! Thank you! 🤗♥️
Fantastic post Amrita. The recent CPI has come as a shocker and the Feds are dealing with a tense situation here. Add to that geopolitical tensions. If the fiscal deficit widens, the government will have no choice but to print more money. Inflation and interest rates will go for a toss then.
Every move the Fed makes now can have a butterfly effect. Let's hope it turns out good.
Excellent article. Please continue to take care of yourself. Your insight and analysis is valuable.
Curious that higher taxes on investment income and higher top marginal tax rates are never mentioned.
Interestingly, the US stock market is solid. It's grown on quite a few companies beyond NVidia. I'm holding my stocks and ETFs, all US equities. However, I can see now that slowly building a position in precious metals was a good decision in 2023-24. That graph showing dollar vs. gold says it all.
Powell surely knows that 2% is mythical, but he knows he doesn't have to be the one admitting this. He'll leave that to a future Chair. He wants to be remembered as the guy who at least tried to hold the line.
With long-term TIP break even only around 2.5%, "the market" is not voicing a big feat either. Once that stays above 3% for a year and bounces toward 4% rather than toward 2%, the next Chair may acknowledge we'll be higher forever
Great and thought provoking post! Once again I point to housing and the CRE market being in a state of “cardiac arrest” - between a high Fed interest rate crippling mortgage borrowing and PE and ’hedgies’ getting into the landlord business when they are ill-equipped to rehab or maintain their inventory to make it available for sale or rent. Call me a dreamer, but a rentier tax with teeth and a hefty insurance surcharge on unoccupied/ unsalable RE ought to bring relief for those that are desperate for affordable housing. While we’re at it, let’s not forget that the Fed was created 100 years ago by bankers FOR bankers. High time we returned control of the currency to the US Treasury with stiffer controls on fractional reserve lending and return to Glass-Steagall separations to protect Consumer banking and the FDIC. (‘rant off’ 🤨)
As much as us individuals want the rates to be lowered, with markets hitting all time highs, I don't think they should be lowered.
The correct move is to "do nothing" and the way to do that iis to reduce the EFFR by a measly 25 bp. Indeed it should probably have done that earlier, in December. An EFFR of 5.00% is still sufficient to keep downward pressure on the PCE .