Yesterday the FOMC enacted no new policy, but through its rhetoric was widely interpreted as ready to yield to Wall Street and White House demands for easier monetary policy. Financial media headlines breathlessly trumpeted the arrival of the Great Pivot.
Ostensibly trillions of value were added to global asset markets. But how could that be? Did trillions worth of new goods and services materialize in the couple of hours between the FOMC announcement and the close of trading on Wall Street?
No one has made such a preposterous claim. That countless hours of professional plumbing and electrical services, medical services, truck driving hours, acres of fertile farmland, apartments for rent … you get the point … sprung into existence upon mere words from a committee of central planners. Because the body of goods and services around the world was unchanged, no new purchasing power can have been created. Yet there can be no question that the average share of stock and bond certificate – collectively many trillions worth – gained in purchasing power. These gains must have come at the expense of losses elsewhere.
What other claims on goods and services are there? Currencies. Notably the one issued by the US Federal Reserve: the dollar. It lost purchasing power not only against stocks as bonds, but against most other currencies as well.
That this loss of purchasing power is destined to become apparent in the market for consumer goods and services was unremarked upon in a financial media focused on the gain seen in stocks and bonds, owned disproportionately by the 1%. No concern was evident for the average American struggling with already realized losses in purchasing power on the heels of the last great reverse Robin Hood heist of 2020-2021.
So the absurdly ironic way of celebrating the fading of the pain of that harvest is to plant another crop.
Yesterday alone, the dollar lost purchasing power of 1.53% against US stocks, 1.44% against XS stocks, 1.18% against Treasury bonds, 1.14% against copper, 2.22% against gold, and 1.65% against crude oil. No one has said so, but does anyone really believe that bears no relationship to its losses of purchasing power against bread, eggs, houses, cars, gasoline … and so on …?
This connection is the biggest financial story of the century receiving the least coverage in the financial media. Virtually none outside of this web site.
When everything looks like it’s going up, your frame of reference is going down. I call it the Titanic Effect … standing on the deck of the Titanic remarking how the ocean is rising.
In this case the US dollar is the Titanic. Average Americans are the passengers. The Federal Reserve is the iceberg.
So how long before this loss of purchasing power is reflected in consumer prices? There’s no simple answer to the question. An iota tomorrow. A smidgen the next day. On over the course of weeks, months and years. The lags also vary according to just how full the asset market inflation storage tanks are.
Moreover, because the most commonly cited derivative of the CPI is the year over year change, an additional half year is added to the headlines. If we look just at changes in the CPI versus stock prices, especially over the last cycle, the most obvious lags begin to kick in around about a year:
CPI – A Lagging Indicator Of Inflation
This would put the bulk of the effect just past the 2024 elections. (Hmmm…) But given the trend is already well underway and the storage reservoir may be near full … it’s not something I would want to pin my reelection hopes on.
it’s an election year and, as you say, it takes about a year for the effect to move into the real economy. Janet did her part by weighting the refunding short, though the rrp will only allow that for about 1 more quarter. now Jay pitched in too
It’s messy business. The lagged effects start to materialize almost immediately in tiny amounts but are scattered and accumulate over a period of years. This has almost certainly contributed to the failure of conventional economics to acknowledge this relationship between asset price inflation and consumer price inflation. The Fed itself has implicitly taken a baby step in that direction by acknowledging the role of “financial conditions” as a “transmission mechanism” from policy to the “real economy”, but only deems it worthy of recognition when it suits its policy agenda. It regularly cited “financial conditions” in 2022 when it was on the inflation warpath but then went mute on it for most of the following year when Wall Street was throwing easy money withdrawal tantrums.
It’s also complicated by the smearing and smoothing thing over time. A spike across asset prices that is soon reversed nets out to little later impact on consumer prices. Only when broad asset price moves are very large or accumulate over time is there a clear echo in consumer prices.
It’s striking that the Fed has been so vocal about not repeating the mistakes of the seventies by easing up too soon when consumer inflation eases and reigniting it before it’s been vanquished, but here it is signaling it’s ready to do just that.
At least some are wary though. NY Fed John Williams was just out this morning walking back some of Wednesday’s dovishness. Just one member but a heavy hitting one.
Also not beyond the pale that financial media overhyped that dovishness in an attempt to whip up “retail” buying interest and pressure the Fed via the expectations fulfillment game. It’s been touting the imminent big “pivot” practically since the tightening campaign began. Wall Street bonuses were slashed and jobs culled, and most financial media are Wall Street’s PR front.
The Fed makes a spectacle of itself by stoking this game. It speaks of “forward guidance” as if it’s a legitimate policy variable, but can’t both predict what it’s going to do and respond to the data that haven’t happened yet. It hasn’t been a credible policymaker since before Maestro Greenspan, on the pretext of “transparency”, started playing expectations games with Fed funds. Volcker had it right … just shut up and implement the policy the data call for when they call for it.
So Fed speakers have been working overtime since Powell’s disastrous presser to walk back dovish market perceptions. As if we needed any more evidence the Fed’s “forward guidance” policy is its biggest single policy mistake since Volcker.
Volcker also had political backs, massive oil production from Alaska, North sea & Mexico. This time we have limited if any political backing, falling production (fracking seems to be slowing).
Also it seems that cargo ships are no longer able to enter the Red sea…..& insurance rates are though the roof. (Not seen since the Iran/Iraq war …..
Volcker gets neither blame nor credit for things he had no control over. Same with Powell. The problem is conduct of monetary policy.
It’s not even that current policy is inappropriate. It’s this absurd fetish with talk, particularly forward guidance.
A little thought experiment. What did the Fed do in March 2020? Could it possibly have had any inkling of it in December 2019?
Yet we’re supposed to pretend it can tell us in December 2023 what policy will be in March 2024. And the rest of the year to boot.
The only way the Fed can predict its own policy months in advance is to formulate it months in advance and ignore any data that come to light in the mean time. Yet it also tells us it will respond to data as they develop. The two are mutually exclusive … it may as well try and tell us black is white and up is down. The result is loss of credibility.
It also moves it even further behind the curve. If it has to tell the markets what it’s going to do before it does it, it adds another delay. Bad enough it focuses on lagging inflation data.
Apparently I’m not alone in warning of a consumer price inflation resurgence. Simon White of Bloomberg, not exactly an out of the mainstream source, sees “a profusion of indicators showing inflation will be rekindled later next year”. He doesn’t directly cite asset price inflation, but among those indicators is the rate cutting in the bond market, identical to bond price inflation, and stock price inflation has obviously been an ancillary phenom.
Fed Backs Self Into Corner Just As Inflation Revives
As I’ve written ad nauseum, not the Fed, but the bond market, is the key, and asset price lead, consumer prices follow.