TEK2day

We critique Fed Chairman Powell’s recent FOMC YouTube clip comments (video below) by time stamp.

• 0:07 – The Fed continues to purchase Treasuries ($80 billion per month) and MBS ($40 billion per month), thereby artificially suppressing interest rates while inflating the money supply. The Fed’s actions – increasing the money supply – are solely responsible for price inflation. Our view is that real GDP has slowed in recent weeks and consumer confidence has dropped as a result of price inflation (i.e. the cost of living has increased dramatically for middle-class America), less so the delta variant. Powell’s comment that “monetary policy will continue to support the economy until the recovery is complete” is not factually correct. Expansionary monetary policy by definition drives price inflation and therefore makes it more expensive for Americans to live day-to-day, even for those Americans that own assets that have appreciated as a result of loose fiscal and monetary policies. The Fed’s mission is to support the capital markets and institutional participants, not main street America as it states. Needless to say we do not subscribe to the wealth effect.
• 0:20 – Fiscal actions have been detrimental to the economy as they have led to price inflation. An economy simply can not inflate its money supply without a commensurate increase in productivity and expect to not have price inflation.
  • Free money in the absence of productivity increases equals price inflation: Printing and delivering “free money” to Americans to spend on a relatively fixed supply of goods and services will naturally lead to price inflation. Inflation is a money supply phenomenon and the U.S. has rapidly expanded the money supply since April 2020.
    • Contrast the “free money” fiscal policy of 2020 and 2021 to an economy that has enjoyed higher living standards as a result of producing and selling more goods and services. Increased production leads to greater corporate profitability and individual income. Higher productivity means more goods and services capacity to meet increases in demand, thereby leveling prices and creating a virtuous circle.
    • Unfortunately, the U.S. produces very little of the goods and services that Americans consume, thereby leading to supply bottlenecks and perpetual trade deficits. When the U.S. ultimately looses reserve currency status it will be due to the combination of perpetual trade deficits and exorbitant public debt levels.
  • Moral hazard: “Free money” creates moral hazard, another unfortunate outcome of the extreme fiscal and monetary policy exercised since April 2020.
  • Increased capacity means higher prices: Ramping up local capacity will ensure that price inflation remains for years. Think of the chip industry as an example. As Intel (one example) ramps local chip production, that multi-year process will result in billions of dollars of expense to Intel which of course will be passed on to customers. This attitude on Wall Street that production happens in a vacuum and that companies will absorb the costs associated with production increases is pure fantasy. Companies will pass on these expenses to customers (enterprise and consumers) in the form of annual price increases.
• 0:28 – Real GDP is actually slowing per the Atlanta Fed’s forecast and U.S. employment has yet to materially improve when one considers that the labor participation rate is flat with August 2020.
• 0:55 – It is disingenuous to assign blame entirely to COVID. Price inflation is a primary reason as to why consumers dine out less frequently given that grocery expenses have increased by approximately one-third year-over-year.
• 1:50 – To say that job gains slowed in August due to the pandemic is a statement that I have yet to see supported by data. Could it be that jobs were not “gained” because employers could not fill open positions as a result of illogical fiscal policy that paid people to stay home?
• 2:01 – Powell again attributes unemployment concerns entirely to the delta variant, no mention of fiscal policy that paid people to stay home through September 6th 2021. Powell would never mention this fact as to do so would be to take a jab at the Biden Administration and Powell wishes to be appointed to another term as Fed Chair by Biden in February 2022. Powell is a political animal. The Fed is an appendage of Treasury. The thought that the Fed is independent is laughable.
• 3:07 – Mailing checks to Americans and endless money printing (poor fiscal and monetary policy), is the primary reason we have price inflation, not re-opening the U.S. economy.
• 3:44 – Good luck to the Fed’s expectations that price inflation will be cut by 50% in 2022. This is a Fed fantasy. We won’t have full capacity by 2022, thus prices for many goods and services will continue to increase at similar rates.
• 4:33 – If you read these pages regularly you know we believe price inflation across asset classes is in the double digits and that CPI is understated, especially as it relates to owners equivalent rent (calculated by Fed surveys of hypothetical price increases rather than using real world rental data). Powell saying that the Fed has the tools to fight inflation is difficult to take seriously. The Fed wants price inflation. Price inflation inflates tax receipts thereby diminishing the debt service expense owed by the fiscal side. Inflation is a friend to the Fed and to Treasury – especially given where public debt levels stand.
• 5:11 – We could write a book in response to Powell’s comments. The Fed is hardly promoting “price stability for the American people” but rather is inflating prices to reduce real public debt expense. Further, it is impossible to be a saver given current monetary policy of negative real interest rates. Even if the Fed were to take the Fed Funds Rate to 2% over the next few years it would do little to encourage savings and likely would not be sufficient to promote positive interest rates in real terms (we expect real world price inflation above 2% for the next few years). The Fed engaged in supporting Apple last year (participating in AAPL’s credit offering), more so than it did main street America.
• 5:22 – Powell’s QE comments are difficult to take seriously as this corporate welfare program was intended as a one-off over a decade ago to stem the bleeding from the financial crisis. Instead, QE has become permanent monetary policy and the markets have become addicted to this easy money. The $60K questions are:
  • Will the Fed actually begin QE tapering?
  • If so, when will the Fed complete QE tapering?
  • If the Fed completes, when will it restart Treasury and MBS asset purchases?
• 6:35 – It is far too early to consider interest rate liftoff as this Fed Chairman has proved to be all bark and no bite.