AFMC - Weekly Commentary: Monetary Disorder

2024-05-20 05:47:00 ET

Summary

• With a 3.9% unemployment rate and still 8.5 million job openings, what is the probability of ongoing elevated wage gains perpetuating second-round inflationary effects (especially in rents and housing)?
• The fundamental predicament today is Monetary Disorder, including speculation running completely out of control. Focus on CPI misses the critical issue of today’s extraordinary price level instabilities.
• Markets see excessively loose conditions and increasingly powerful inflationary dynamics. The Bloomberg Commodities Index surged 2.9% this week, boosting y-t-d gains to 7.2%.

An audience question during the annual meeting of the Foreign Bankers’ Association of Amsterdam, May 14, 2024:

“Do you entertain the possibility that returning to the 2% target will not be possible with the current level of the Fed funds rate?”

Chair Powell: “I do think it’s really a question of keeping the policy rate at the current level for a longer time than had been thought. By many, many measures, the policy rate is restrictive. The question is, ‘Is it sufficiently restrictive?’ And I think that’s going to be a question that time will have to tell. Entertain the possibility – that could be a very small probability – but I have said that I don’t think it is likely, based on the data we have, that the next move that we make would be a rate hike. I think it’s more likely we’ll be in a place where we hold the policy rate where it is.”

Disciplined central bankers would undoubtedly more than “entertain the possibility” that additional rate hikes will be necessary to return the system to price stability. To be sure, this is not the backdrop to signal that additional policy tightening is off the table.

Importantly, it is a consequential analytical and communications blunder to assert today that there is only a “very small probability” of inflation surprising to the upside. For starters, the sordid history of inflationism informs us that once inflation has taken hold, it becomes quite difficult to return to price stability. “Immaculate disinflation” is a contemporary contrivance.

U.S. CPI experience is a case in point. After consumer inflation jumped to 6.1% in December 1969, it had dropped back to 2.7% by June 1972. But CPI was back up to 12.3% in December 1974, before settling back down to 5.5% by September 1976. But an inflationary surge saw CPI spike to 14.8% by March 1980. Then, after dropping to 1.1% in December 1986, CPI was back up to 6.2% by September 1990....

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