Tomorrow’s CPI release is inconsequential at this point. Prices for finished Goods & Services likely modestly abated and will remain elevated in our view such that 2% CPI is not going to happen this year. More pressing for the Fed is the ongoing banking crisis.
The fixed income market ought to be setting interest rates, not our Central Bank via its Fed Funds Rate. If the Fed wants to tighten or loosen monetary policy, let it do so by tweaking the money supply. The Fed did more than tweak monetary policy from 2009-Q1 2022 – it opened the flood gates with its foolish QE programs for which we are paying the consequence via price inflation.
- The Fed’s inflation remedy – taking its Fed Fuds Rate from 0.00-0.25% to 5.00-5.25% – has crippled the Banking industry by simultaneously causing deposit flight and hammering the value of banks’ fixed income assets (while doing little to curb inflation).
- Our view is that the Fed will start to move its Fed Funds Rate lower this summer which will alleviate some of the pressure the banks are facing (I’m not sympathetic to the banks), especially as it relates to re-inflating the value of fixed income assets held by the banks.
- Should the Fed want to continue to fight inflation, it may do so by shrinking the money supply or holding it flat (this will put an upward bias on interest rates as the Fed reduces its Fed Funds Rate).
- Thus far, the Fed’s QT effort (shrinking the money supply by allowing certain Balance Sheet holdings to mature), has been underwhelming. The Fed was far too aggressive with its QE effort and far too conservative with its QT effort.
- Our view is that the Fed will expand the money supply over the next number of months in order to subsidize the fiscal deficit as well as to support the forthcoming Treasury auctions under Treasury secretary Janet Yellen as the debt ceiling is lifted.
- We are likely to see more bank failures before summer is in full swing. Further, 3-4% CPI will be the new normal. 3-4% CPI plus 0-2% Real GDP = Stagflation = we’re living it.