ACTV - Tough Talk On Inflation Without Persuasive Evidence
2023-07-03 09:30:00 ET
Summary
- Powell talks tough on the inflation fight two weeks in a row without persuasive evidence that the Fed needs to do more.
- Threatening rate increases or actually implementing them does not mean the Fed is removing the liquidity punchbowl.
- The market seems to be chomping at the bit to begin the next stage of the secular bull market that began in April 2013.
Since May of last year, the annualized, adjusted CPI growth for the United States was 4% . This was versus over 9% for the period ending June 2022. When the numbers are reported for June 2023, the trailing twelve-month CPI is likely to drop well below 4% because the June number for 2022 (+1.2%) will be coming out of the calculation and June 2023 will be added. The biggest increase in CPI we've seen in the past eleven months is .5%. If that were to be the number, we would be looking at a trailing twelve-month number of only 3.3%. This would represent significant progress over the past year and a policy success, considering the sharp rate increases implemented by the Fed over the past 16 months and the still very healthy economy.
June 2023 CPI numbers versus June '22 (an easy comparison is coming) plus the Fed's "full employment" mandate should make it difficult for Chairman Powell to defend his hawkish position.
Threatened or actual rate increases do not mean the liquidity punchbowl has been withdrawn
We don't hear much about Quantitative Easing (QE - expanding the Fed's balance sheet) or Quantitative Tightening (QT - shrinking the Fed's balance sheet) these days. QT plus rate increases were supposed to be the double-edged sword that the Fed would use to tank the economy to get inflation under control. The reason you don't hear much about QT is that they haven't really done much of it since the Fed balance sheet peaked in May 2023 at near $9 trillion . As of June 14, 2023, it stood at $8.4 trillion versus $4 trillion just before the pandemic. When the Fed bought all those government and mortgage-backed securities, they injected a huge amount of liquidity into the economy. Despite the hawkish rhetoric, very little of that liquidity has been pulled back in... $600 million versus a nearly $5 trillion infusion during the pandemic.
According to economist Scott Grannis, M2 money supply "is still about $2.6 trillion above where it might have been in the absence of the Covid crisis." He argues that this "extra" amount of M2 (cash in hand, checking accounts and savings accounts - not including CDs and money market funds) serves as a cushion against recession, because it means that the economy is still flush with cash and liquidity.
It would appear that the more important issue governing our economy and Fed policy is liquidity and not what the money cost. Thus, while the average pundit and talking head bemoans the certain catastrophe that lies ahead arising from the recent rapid rise in rates, they have missed the fact that the Fed never took the liquidity punchbowl away.
The market's chomping at the bit for new highs
This may be disturbing Powell... a reason behind all the tough talk and bluster. He may be worried that an explosive equity market could re-exert upward pressure on prices in general. On the other hand, Fed/monetary policy is not a game of perfect. There may be additional lagged effects of rate increases put in months ago. Who knows? We might even have a recession. Most importantly, we may have already priced a recession into the market last October... a recession that has yet to materialize.
Sir John Templeton once said, "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." I've been monitoring this secular bull market since the spring of 2013. I would be hard-pressed to show you any period in the last ten years that could be confused with the "optimism" stage. As the market "chomps at the bit," some naysayers are positing that they may have been early on their negative call. I say, no, they were right last October... they just forgot to turn positive. Someone once told me, "you can never be too bullish in a bull market!"
What do you think about the possibility that we will have our cake and eat it too this time around?
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Tough Talk On Inflation Without Persuasive Evidence