The 60's on Steroids

Macro Perspectives: Mon 22 Mar 2021

We talked about inflation and interest rates all week, in the build up to and aftermath of, the Wednesday Fed meeting. Indeed, this dynamic has become the primary focus for the markets as we ended the week.

The market is beginning to price in inflation, maybe hot inflation. The Fed continues to stand its ground, telling us they don't see it. Even some of the most partisan economists (on the left) are concerned about inflation, following the massive $1.9 trillion stimulus. Larry Summers, former Treasury Secretary, flatly said, putting this $1.9 trillion on top of the $900 billion (from December) "will set the economy on fire."

He sees one of three outcomes:

1) inflation will run hot, the Fed will stay behind the curve (inflation-rife country),

2) the Fed will kill the economy with rate hikes and create recession,

3) the Fed will perfectly thread the needle, taming a period of very rapid growth back to reasonable growth.

Bottom line, he says "very substantial risks on the path we are on."

We seem to be reliving the policies of the 1960s "on steroids." Like the 60s, policymakers have grown complacent about a period of low inflation and "political leaders think we have needs that are pressing and they want to push through" (taking advantage of what they believe is structurally low inflation). 

A clear loser (as we've discussed) in the likely outcome here, the dollar. Summers agrees.