How Many Basis Points Did You Say?

And you thought Finster was out there …

I recently argued in favor of a 100 basis point rate hike from the Fed … along with a clear statement that it implied nothing about future hikes. As opposed to a smaller hike and endless speculation about how many more. This was a radical suggestion at the time, but according to this MarketWatch article, Bill Ackman has come out in favor of a 100 bp hike with today’s coming announcement. Jeff Gundlach, not known for wild-eyed hip-shooting, says 200 bp.

Okay wow … it feels like we’re swinging from one extreme to the other. According to the article, Ackman says Fed funds needs to get not just 4%, but 5%-6%. After spending years in the hawkish camp, highly critical of the Fed for staying too low too long, it feels strange to be a voice of moderation. Ackman could have no way of knowing that … no one could. It’s proper and sufficient for the Fed to merely bring short rates into harmony with the rest of the yield curve … a bit lower than where rates sit a little further out. Then see what happens. Asset prices needed to come down to timely tame consumer price inflation, but they don’t need to crash. US stocks are still overvalued, but Treasuries and foreign stocks need only refrain from shooting back up for consumer price inflation to ebb.

Recall we recently made a point of distinguishing between dollar depreciation and real price increases, in Inflation And Rising Prices. It’s not a monetary policy problem to address real price increases due to nonmonetary problems like lockdowns and trade sanctions. Those are government interference problems. On the other hand, accelerating inflation can cause shortages too, so taming dollar depreciation can contribute to mitigating some of the pressure blamed on supply chain kinks. So policymakers have to be wary of using apparent “supply constraints” as an excuse to tolerate true inflation.

This is one reason a better measure of broad inflation, of the value of the dollar, needs to be used to inform monetary policy. We’re under no illusions that the Fed and monetary economics establishment is about to change its ways, but that’s what the Financology Dollar Index is.

The FDI shows clear progress on inflation, and all the Fed need do is not undo it. Get Fed funds into line with the rest of the yield curve now and stop talking about what you’re going to do later.

That’s what future FOMC meetings are for.

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