Last year we predicted 2022 Real GDP in the 0-2% range (The Atlanta Fed’s GDPNow cast for Q1’22 is 0.5% as of March 8th). A recession this year is inevitable as the Fed moves to increase the Fed Funds rate and migrates from Quantitative Easing to Quantitative Tightening (Thereby shrinking the money supply).
The first outcome of the Fed tightening monetary policy will not be to curb inflation, but rather reduced economic activity. This reduced econonic output will not be a one quarter phenomenon but will more likely last for several quarters or longer.
The Fed has its hands tied. In the past the Fed’s solution to a slowing economy was to adopt a more accomodative monetary policy. Were the Fed to do so now would ensure that elevated price inflation persists for the long-term. Our view is that this Fed under Powell will not do enough to curb inflation as Powell cares more about propping up the equity market and inflating the fiscal debt ($30.3 Trillion), away.
In terms of what to expect for a long-term CPI? Annualizing last week’s monthly CPI figure implies a 10% annualized CPI rate. Thinking out to the 2023-2030 timeframe, an average annual CPI figure in the 5-6% range feels about right. Why? The answer is because the Federal Reserve will continue to print enormous sums of money to subsidize fiscal deficits, to subsidize entitlement programs, to subsidize healthcare costs and other social programs to say nothing of subsidizing military over-reach.
As inflation persists, the USD will slowly work its way toward zero. It is for these reasons we like commodities as long-term investments as they represent tangible value, unlike crypto-currencies, NFTs and other “securities” which are valued on hope and a prayer.