The Fed’s “Fed Funds Rate” forecast for the next several years is not realistic. Our view is that the Fed will move to raise its Fed Funds Rate more quickly than its published forecast (see page 2 of 17).
The Fed anticipates median Fed Funds Rates of 0.3%, 1.0% and 1.8% in 2022, 2023 and 2024 respectively (as of Sept. 22), up from 0.1%, 0.6% and null as of the Fed’s June projections. We believe the Fed’s projections as of Sept. 22 could be pulled forward by a full year (see table below), as price inflation will persist longer and grow higher than the Fed anticipates, even when taking into consideration the Fed’s fuzzy CPI-based inflation math.
At a high level, price inflation will persist because:
- Inflation is always and everywhere a money supply issue (Milton Friedman) and the Fed will continue to expand the money supply at a rapid pace to support Fiscal spending efforts. The ironic thing about the Biden Administration’s deficit-expanding fiscal spending is that while these programs are designed to win over voters at the 2022 mid-term ballot box and 2024 General Election, these very spending programs are causing the price inflation that will see middle class America vote out the Biden Administration in 2024 and make it difficult for the Democrats to hold position during the 2022 mid-terms.
- Supply bottlenecks will persist and come at a price to buyers. For example, a number of Automotive CEOs have publicly stated that they expect the chip shortage to plague the automotive industry for another 2-3 years (that’s their guess which may be too optimistic). Generally speaking, new supply of any kind does not come on-line for free. New supply / new production capacity comes at a cost. Those costs will be passed on to buyers for several years or more in the form of price increases. There is no free lunch.
- Wage inflation. Competition for workers will drive wages and prices for goods and services higher through 2022 and into 2023. Thus, the middle-class and working poor will be further penalized by the inflation tax.