98% Talk & 2% Action

Macro Perspectives: Thu 29 Apr 2021

We heard from the Fed yesterday - and whilst  the market is looking for any admission that they are worried about inflation - once again, we didn't get it.

This has boggled the minds of many, even experienced Wall Streeters.

So before we get into the presser, a quick glance at the chart below set’s the tone for the above mentioned boggled minds…

We have unabashed massive deficit spending, that seems to have no limits when you have a President looking to wholesale change an economy, and an aligned Congress ready to rubber-stamp anything coming from the President's desk. If $3 trillion of fiscal stimulus wasn't enough last year to plug the gap of economic losses from the pandemic (the simple math says, it easily was), we have another $1.9 trillion in process, over $2.3 trillion being drawn up for "infrastructure, and now $1.8 trillion proposed "for families."

Add to that, the Fed itself has created money out of thin air to buy a variety of assets and stuff bank balance sheets.

This is increasing the quantity of money and the ease of access to money, and it’s all far beyond what is necessary to respond to an emergency economic situation. It’s all a recipe for making the money in your pocket worth less. We've seen that translate into much higher prices for homes, cars, metals, lumber, food...you name it.

But the Fed has maintained that they don't see inflation as a problem. They do admit, that in the near term we will see some inflation that runs above their target of 2%.

They want us to believe that they believe it will be temporary.

And they can explain it away, as Jay Powell did - the inflation numbers are going to be big against last year's shutdown economy, from the "base effects." He's right. The numbers will look huge, in a "reopening economy" when compared to a virtually closed economy of a year ago. He says there are "bottleneck effects" from the supply disruption. He’s right. It will cause higher prices, but will normalise as the supply constraints ease.

Okay, we can buy that, but what about the trillions of dollars of excess spending being dumped on the country? That's the inflation question people want answered from Jay Powell. It was asked in the press conference, Powell didn't answer it.

This tells us all we need to know. The Fed knows the inflation tsunami is coming, but telling everyone about it, at this stage, isn't going to help - but it could harm.

As Bernanke once said, "monetary policy is 98 percent talk and only two percent action.” The Fed is doing a lot of talking, trying to maintain a stable recovery. They know the big test is ahead (in the not too distant future) when they will have to chase inflation, and try to carefully thread the needle, hiking rates to get inflation under control, while trying to avoid crushing the economy.