From Powell to Brainard, via Inflation.

Macro Perspectives: Thu 11 Nov 21

We've talked throughout the year about the likelihood of seeing double digit inflation, given how the monthly change in prices was coming in. If we extrapolate out the October number, we get a 10.8% annual rate.

Now, consider this: As of mid September, there was still $550 billion of the $1.9 trillion stimulus passed earlier this year that has yet to be disbursed. Now we have another $1.2 trillion spend coming down the line.

All of this, and the Fed is still buying $105 billion bonds a month (i.e. injecting $105 billion into the economy).

So the Fed is still running emergency policies, just for the wrong emergency (in the wrong direction). This is the most dangerous inflation we've seen since the Volcker era.

On that note, remember back in August we talked about some comments Jay Powell made in a town hall meeting, about Volcker. He admiringly called him "the most distinguished public servant, in economies, in [Powell's] lifetime." He said he admires him because of his courage to take on the unpopular, but necessary path of beating what Powell calls The Great Inflation.

Volcker beat double-digit inflation with short-term interest rates that approached 20% - and in doing so, he took the economy into recession. But he also set the stage for a long and very good period of development for the U.S. economy.

That said, if we had a sense that Powell is prepared to become an inflation fighter, we also have a sense that the Biden administration doesn't want an inflation fighter.

On Friday, Biden interviewed one of the most dovish Fed Governors, as a candidate to replace Powell. With Brainard, you get a Fed that would fall even further behind on inflation. She will support the move to a central-bank backed digital currency and she will execute on the Biden social and climate agenda (which includes tougher positions on bank regulation).

This candidate only makes sense if you (the Biden administration) think this agenda of America transformation (social, energy, health care, financial) will become such a drag on the economy, that inflation will naturally fall back from demand disruption - and require Fed life support.