FOMC Minutes - High Inflation & Hyper Growth

Macro Perspectives

The minutes from the July Fed meeting were released yesterday afternoon.

Stocks started the day lower (chart above), on speculation that some new (hawkish) information might be gleaned from the minutes. But as we discussed on Monday, the meaningful takeaway from the July Fed meeting came from Jay Powell in the press conference (AFTER the meeting), where he said the newly set Fed Funds rate of 2.25%-2.5% was neutral (no longer accommodative)!

And then he said they would no longer "guide" on policy, but rather take things meeting by meeting, depending on the data. To that point, dating back to March, their "guidance" had consisted of the threat to "expeditiously" bring inflation down.

Where was inflation in July? Exactly at the same level it was in March, when they claimed they would be "expeditious" in bringing it down.

Still, in July, they proclaimed they had reached the neutral level for interest rates - that tells us all we need to know about the appetite the Fed has for meaningfully higher interest rates (i.e. none).

What's most interesting in witnessing the Wall Street and financial media's parsing of the Fed minutes, is that there was little-to-no-mention of the massive fiscal spend that was greenlighted in the hours following that July 27th Fed meeting. Do they not think that a trillion dollars of fresh, mostly unexpected, fiscal spending will affect inflation, and the Fed's gameplan?

More likely, they know the Fed couldn't fight the inflation battle that was in front of them already, much less one with even more deficit spending poured on top.

How does it all play out, with a Fed that lets inflation run hot, and a government that rolls out bazooka funding for an economic transformation plan?

You can get high inflation (still), but you also get hyper-growth.

Remember, earlier this year we looked at the early 1940s period as a potential analogue to the current period. Coming out of the Depression, we had the New Deal (a huge government spending program), and war spending (World War 2).

Growth boomed - real economic growth (growth after inflation) averaged 14% per year from 1939 to 1943.