Why I remain on Team Transitory
That is the topic of my latest Bloomberg column, here is one excerpt:
The case for Team Transitory is not about whether the next pending inflation numbers will come in high or low. Instead it consists of the following two propositions:
And:
Perhaps most important, there is the market’s perspective — and the market expects the Fed to bring down inflation rates. As I write, the 10-year Treasury yield is 1.64%. That yield has been rising, but it hardly seems to predict hyperinflation, or even 5% inflation for the next 10 years. The most negative piece of evidence so far is from the TIPS market, which is predicting inflation of about 3% over the next five years.
You might be wondering whether "the market" understands inflation and the Fed. Well, investors are obsessed with the Fed and study it closely. When I encounter Team Transitory skeptics, I ask them: "What is it that you understand about the Fed that the broader market does not?" I have yet to receive a compelling answer.
As an add-on note, properly interpreted those TIPS data probably are suggesting expected inflation rates of less than three percent, perhaps even closer to two percent looking forward.
Comments
"What is it that you understand about the Fed that the broader market does not?"
Probably nothing. I get that market expectations are a good indicator, but TIPS have historically under-predicted inflation. Regarding history, the most recent episode the United States experienced with inflation was the 1970s when the Fed acted way too late and brought the economy to a sudden halt. Volcker(appointed by Carter) was something of a monetarist and the Reagan administration was willing to back him.
This time around I feel that the current administration is much less likely to grind the economy to a halt in order to stave off inflation. Very little is going right and the last thing Biden needs is a "controlled" recession to drop inflation from ~5% down to 2%. Other things to consider are that the Federal Funds Rate is at almost 0 again and there is little room to maneuver on that conventional front.
Finally, I've been thinking how much of this is a supply shock(temporary) vs actual inflation(monetary policy). On the one hand the government got interest rates back down to 0 and went back into a new version of QE during the COVID-19 recession. Unlike last time during the Great Recession they didn't just fatten up bank balance sheets but the government actually gave out a lot of money(was this an experiment with QE for the people?).
If this is a monetary phenomena then we need a monetary fix, which is always painful. If it's a supply shock( gas prices, great resignation, supply chain) then markets will in time, with necessary public policy adjustments, resolve the issue and team transitory wins. If, however, this is a monetary policy thing, then the Fed will have to resolve the issue and that will only happen if there is the political will to do it. If the political will is there then team transitory still wins, but at a cost.
TIPS and Treasuries will keep underpredicting inflation. As a safe haven asset especially for regulated banks and insurances, that's just what they do.
Probably, but TIPS spreads overpredicted inflation for most of the past decade before 2020.
FRED graphs seems to be out of service today but when I eyeballed it last night, it seemed that the TIPS spread in recent years does NOT support Luka's claim about under-predicting inflation. Luka should try to clarify that claim. Much depends on which duration you are looking at and the specific span of history.
I checked both FRED's 10 Year Breakeven Inflation Rate and 5 Year Breakeven Inflation Rate as far back as they have data. I added the CPI to each graph and set that line to "% change from 1 year ago". In terms of frequency I normalized everything to monthly. The only period where the TIPS spread under-predicts inflation for what I would consider an extended period of time was mid 2012 to summer 2016. Here are both graphs.
https://imgur.com/a/R9NWi6t
I'm not sure I follow why this means that TIPS will be systematically biased in pricing inflation expectations compared to regular Treasuries.
I agree that yields overall are low in part due to "financial repression" (regulation forces banks and insurance companies and others into Treasuries). But that's true for both TIPS and regular. Shouldn't the break-even spread between the two then still be an unbiased, market-based predictor of inflation expectations?
Certainly expectations can be wrong ex post, but I don't see how the break-even spread between TIPS and regular isn't the best market-based forecast available.
As your post kind of acknowledges, those markets aren't predicting inflation, they're predicting the Fed's political willingness to incur the cost of fighting inflation. At this point, they're predicting that the Fed won't induce a recession under a Democratic administration, which makes sense. Taking action that potentially benefits Trump would get them accused of treason.
"the Federal Funds Rate is at almost 0 again and there is little room to maneuver on that conventional front"
Isn't it the exact opposite? Usually fed funds rate is increased when they think inflation is getting too high?
Yeah, my mistake, ignore that part. I had it in my head we were still in a recession and was thinking of what they would do if the economy started to decline further, not them having to create one to fight inflation tightening money.
LOL.
yeah, LOL is proper response to Tyler & Federal Reserve Banksters.
Hard historical facts tell us common folks all we need to know about Inflation and our beloved Federal Reserve guardians:
* a 1913 US Dollar is now worth 4 Cents in actual purchasing value.
(heckofajob by the Fed controlling Inflation !)
Tyler thinks a 2% Inflation Rate is really nice and desirable, but even that "seemingly" mild inflation rate will destroy most of one's Dollar savings in a few decades.
Any monetary inflation is always bad for the general economy and savers.
"* a 1913 US Dollar is now worth 4 Cents in actual purchasing value.
(heckofajob by the Fed controlling Inflation !)"
"Any monetary inflation is always bad for the general economy and savers."
The 'general economy' improved a lot more between 1913 and 2020 than it did between 1806 and 1913. More important this is a rather bespoke definition of 'saver'. Namely someone who keeps a huge amount of cash money set aside for a century or more. Is this an Anne Rice vampire we are talking about?
In real life saving means buying assets ranging from simple bank deposits all the way up to stocks and real estate. By that measure a person with even a modest amount of saving in 1913 who let it run for 107 years is pretty well off now.
None of this however is remotely responsive to what Tyler wrote.
TL;DR - if you think inflation expectations are wrong, what is it you know that everyone else doesn't? The market does not expect high amounts of inflation.
> a 1913 US Dollar is now worth 4 Cents in actual purchasing value.
But that same 1913 dollar if it went into the market would be worth around $20 after inflation, nearly bringing you back to "whole". Moral of the story: Don't stick your dollar under the mattress.
With TIPS you aren't betting on inflation, but on the governments inflation metric (who pays out if that metric is high...the same government).
In terms of the market, what's the best way to bet on inflation. Would you short treasuries, or would you take out a 30 year fixed loan and buy up real estate. Or put your money in stocks/crypto/whatever. You would go long, not short.
Whose buying treasuries at these prices? The Fed. Banks and insurers that need those assets. Your 401k automatically shifting to bonds as you get closer to retirement. Etc.
Sorry, Luka. You don't mention how the U.S. government expenditures are expected to grow and how the expenditures will be financed. That means you don't know the history and theory of inflation.
You are too much worried about what may happen in the short run. If you study the history of government expenditures and their financing, soon you will learn about the many experiences in which sudden increases in expenditures implied the exhaustion of taxation and borrowing leaving only inflationary financing as a source of funds. The empirical study of inflation, like that of all complex issues, demands too much work. On inflation, there have been many attempts but few provided relevant and reliable evidence about episodes of high inflation and hyperinflation with large social costs (within these few studies I include unpublished Ph.D. thesis under the guidance of Milton Friedman in the 1950s and early 1960s; unfortunately, however, in the late 1960s MF wanted to extend that analysis to low inflation experiences and failed as shown by his proposal of a policy rule based on wrong assumptions about the demand and the supply of money).
Yes, short-term variations in price indexes are often used as indicators of inflation by economists and reporters. They know nothing about the history and theory of inflation and their "analysis" at best is irrelevant but often a diversion from serious issuers. Tyler may claim to know a lot of things but his knowledge is so superficial that he's an expert on nothing. He may entertain readers but as shown by this post and the related Bloomberg column he knows nothing about inflation. First, Tyler claims that today inflation is "high" but by all records of inflation in the past thousand years it's not. The relevant issue is whether the inflation rate --properly measured-- will continue to increase to a level that people may become concerned about its social cost (some will say at 10% per year, others at 20%, and I will say at well over 20% --btw, for the past 70 years I have been following the inflationary experience of Argentina where inflation today is running at 50% per year and it's expected to increase sharply in 2022). Second, he claims that even today's "high" inflation is temporary but he makes no reference to how the expected large increase in government expenditure will be financed, something that would require the simultaneous review of all sources of funding.
I believe your propositions leave out a possible third proposition. How big of a decrease in the stock market, or increase in the unemployment rate, will the Fed be willing to tolerate to bring inflation down to the 2% target? It seems like almost none of either; therefore:
1.The Federal Reserve can control the rate of price inflation.
2.The Federal Reserve does not want inflation to be very high.
3. The Federal Reserve has lost the will to negatively impact equity market capitalization and the labor market.
Politically, it’s hard to see the window opening for fighting inflation for another year. Powell and Brainard will have to commit to tolerating inflation through the 2022 midterm elections in order to get reappointed/appointed. So inflation-fighting will have to wait until 2023. Transitory under some definitions, I guess.
Ryan & FE,
Bingo - top comment. Nobody disagrees that the Fed can fight inflation with interest rate hikes and cutting QE. However, the Fed is a paper tiger that will not fight inflation because the fight would be too damaging politically while leaving the Fed open to unscrupulous attacks from progressives and the mainstream media about how lifting rates is "racist", "misogynist" and every other vapid platitude Dems sling.
Better to play ignorant about inflation or continusouly move the goal posts on what "transitory" means.
Most people would not use 24 months of inflation as "transitory" as the reduction in purchasing power during the stint will be painful.
If the Fed was going to fight inflation, which is the highest in decades, the battle would have started. Who is winning right now? Exactly.
Can we all agree that writing everyone checks at this point to stimulate the economy is not a particularly wise idea given that there are known bottlenecks which will actually prevent increases in employment or production?
No, Krugman and his ilk won't agree, so no, we cannot all agree.
We cannot even all agree that price controls create undesirable economic distortions.
Can you and I agree that central planning via government-controlled central banking is an unwise idea? Delimiting the "we" while broadening the principle.
I don't know about you but I'm price sensitive about the things in containers floating off the coast of Long Beach and Los Angeles. I'm also price sensitive about new and used cars. Still it's understandable that I might pay more for those items in a pandemic when I spend much less at airlines, restaurants, and hotels.
When spending gets redirected to airlines, restaurants, and hotels, willingness to pay 2021 prices for other things will ebb.
About the stimulus checks... I was surprised that there were payments of that nature. Was that a recognition that many people cannot get unemployment benefits because of their undocumented status or was it that Trump wanted to throw money around to get re-elected or was it that normal counter-cyclical payments would be distributed too slowly?
I think you're severely underestimating the numerous extreme negative impacts of hiking rates on the economy. You're also underestimating the extent to which the Fed has become politicized, i.e. at the whims of members of Congress.
TC predicts A) That inflation won't be above 5% for 10 years. Man, he's really gone out on the limb there!! and B) There'll be no hyperinflation. Even more daring! Gotta respect a guy willing to be clear about what he thinks. Would 3 years of price rises above 3% falsify his claims? Totally clear, right?
Hyperinflation is generally defined as 50% price increases in the span of a single month. So no, there won't be hyperinflation.
Instead it consists of the following two propositions:
The Federal Reserve can control the rate of price inflation.
The Federal Reserve does not want inflation to be very high.
Does price inflation include the price of assets in these propositions?
No, because inflation is bad, and asset price inflation is considered good.
Only wage inflation and consumer goods inflation are bad. Wage inflation is bad because it makes labor more expensive for the wealthy; consumer goods inflation is bad because it can threaten social stability and the position and lives of the wealthy.
The ideal is asset price inflation with low wage and consumer goods inflation. Asset price inflation keeps the wealthy on top, with consumer goods i.e. bread and circuses cheap enough to keep labor docile despite low wages. The ideal is "You'll own nothing and be happy."
Wage increases are great. Inflation is not great because it does not result in real wage increases. Wages only increase at the rate of prices. The primary effect of a increase in inflation is to erode the value of certain assets including pensions, while also reducing the burden of certain debts. If inflation becomes uncontrolled/unpredictable, then there are huge problems for the economy because it becomes difficult to contract for the long term.
Asset price inflation only helps if you can sell/borrow against those assets and use it to bid up real resources. But if those real resources inflate in price too, then it's a zero sum game.
Not just sell/borrow, but rent. The rent from real estate and financial assets i.e. interest.
That's what being wealthy means - owning inflated assets that you can sell/borrow against/rent so you don't have to depend on labor income.
It's zero sum for rentiers i.e. the wealthy. Hence the ideal of asset price inflation and wage/consumer goods deflation/disinflation.
I'd rather own nothing and be happy than own a lot and be unhappy.
I doubt the wealthy care much about the cost of labor - they don’t consume enough to matter. If the cost of Pelosi’s haircut, or Gore’s massage, or Obama’s gardener triples - it’s just inconsequential noise.
Now if the cost of private jets or big houses in the Hamptons tripled, they might notice,
Labor is an input to everything, and more of an input in the services the wealthy demand.
Non-professional services the wealthy demand are low pay and low status. That's why they're immigrant heavy - the low wages are enough for them and they're outside of the status economy of the domestic society.
With high wages, people avoid non-pro service work.
"Engineer," more like "Drooling Ideologue." So, your examples of "the wealthy" are Pelosi, Gore, and Obama, but somehow not self-proclaimed billionaire who probably is not one, Trump, much less actual multi-billionaires like Musk or Bezos. Sheesh. You are a joke.
I would say the problem is paper assets are not fundamentally connected to the economy. If stock prices are high, more stocks can be created without any real activity in the economy other than some legal fees and filing a few papers. A company can split its stock or you can create a new company that sells shares out of nothing.
The price of lumber goes up, lumber mills start running night shifts until they max out their capacity at which point they can do nothing but increase the price.
The price of stocks goes up and disgraced former presidents can create a SPAC and flood the market with shares. Or a half dozen new cryptocoins are launched on Coinbase.
The first is the real economy, the second isn't.
The other problem is double counting. Real assets like property are already capatured directly or indirectly in price data. Trucks get more expensive and truck delieveries get more pricey which means Starbucks raises its prices. But if you are also including the share price of the trucking company in your inflation calculation, you are double counting since owning the shares means at the end of the day you own the trucks too.
Is the price of a house given by it's sale value or monthly mortgage cost?
"Is the price of a house given by it's sale value or monthly mortgage cost?"
It really depends on the buyer. Some people, buying well within their means, are solely looking at the current sale value compared to the potential future sale value. Others are looking at the monthly mortgage cost as compared to what they are currently paying in rent/mortgage. Both types are looking at the extra benefits too of course, bigger house, better school district, shorter commute, etc.
I wonder if (invoking one of Tyler's laws) someone could point to research on that. I'm interested in knowing the ratio.
On average, though, buyers cannot get mortgages far beyond their means. Likewise when a buyer has means, real estate agents have the incentive to upsell them in order to get them into the most expensive house possible as long as it isn't so expensive the bank blows up the sale by refusing the mortgage.
I feel rental price is the better measure but mortgage payments for regular people are probably reasonably in line too.
I believe in the US it is done by estimating its rental cost per month. Think of the house as a small business or machine providing the service of a place to live. The price of a place to live would be what it would take to buy that in a month, i.e. rent. People who own their own house are simply like people who grow some produce in their backyard. The value of their produce is given by what the supermarket is charging for produce, even if they don't have to use the supermarket.
The issue is basically two-fold:
1) Real GDP growth is close to zero in Q3. The Fed might want to control inflation but it also wants growth. The Fed does not control energy or logistics shocks.
2) Yet more fiscal "stimulus" coming (maybe). The Fed might be unwilling to counteract it.
Even transitory inflation means a usually permanent rise in prices. I have read economics and feel the usual reasons for 2% inflation are bullshit. I would prefer price deflation. Free trade is deflationalry.
George,
Spot on assessment. Even if inflation is "transitory" (whatever that means anymore), there is no way price increases are going to retreat. Consumers are going to be worse off for the lack of courage at the Fed as purchasing power dwindles.
Dahc,
"No way price increases are going to retreat"? Really? Coal prices in China have declined by 50% in the past week. Lumber prices have also fallen substantially recently.
Gasoline prices have risen a lot recently and are getting a lot of attention. But they have been higher in the past. They came down. Indeed, oil and gasoline have a long history of prices going up and then going back down again, including after periods when inflation was a lot higher than it is now, such as the 1970s. Futures markets in oil are forecasting declining prices soon.
So, just how ignorant are you that you know none of this?
I am sure they will find a way to keep standard definitions of inflation technically in the 2-5% range, while housing, cars, consumer electronics, and the labor market all find a new price level at 30-50% higher than 2018.
Otherwise, I guess you can find a way to short those markets...?
Havelsonly,
Excellent point on how the inputs to CPI have constantly been changing to make the reading look softer.
Owners equivalent rent, which is about 30% of CPI, is a joke of metric to use for housing but has been done so to keep CPI aligned. Swap out OER with the more logical median home price or actually rental rates and CPI shoots even higher.
Moving the goal posts to keep CPI "down" while the plebs suffer from rising prices is a classic bureaucratic method.
I first read the title as "Why I Remain on Team Tranny" and that Cowen was writing about why he opposes Dave Chappelle's latest special.
Which is why when properly interpreted, Americans are living in the best of all possible worlds.
>What is it that you understand about the Fed that the broader market does not
What I understand about the Fed is the way to make enormous amounts of money is to use the pieces of paper that they back and leverage it 40x of more to get a return. If I go along with what they want I will prosper.
Price fixing schemes don't adjust, they collapse. Does anyone actually think tips and the published inflation rate has anything to do with reality? The cost of bucking it is too high, so most everyone will either go along, or check out. My little town is crowded with people checking out.
How big is the underground economy getting?
I am also on team transitory but I am also not sure the market is accounting for the risk of a more politically motivated (i.e. inflation tolerant) Fed Chair taking over in February.
As long as the Fed can purchase TIPS, they woiuld not predict inflation as much as they announce the manipulated price of TIPS.
For those who think the inflation is simply a transient event due to supply chain and labor issues, I have a serious question:
What would you expect to have happen if the government printed 7 trillion dollars and helicopter-dropped it on the people? That is, so far as I can tell, sort of what happened?
Previous QE didn't cause inflation because it was given to the banks as reserves, and velocity was dropping keeping the money supply stable. This seems completely different.
Second: Those who are confident that the fed has tools to reign in inflation... what are they? I don't see how they can raise interest rates given the indebtedness levels of everyone from governments to individuals. I don't see how they can stop QE while the government is borrowing trillions of dollars, since there is no one else who can lend the government that kind of money. What other tools have they got?
I've said before that our central bankers and politicians have been flying us into a fiscal 'coffin corner'. I'd love to hear how they plan to fly us out without crashing and burning.
Wages, housing, manufacturing and shipping are all going up well after the Fed began their actions. While they may have tools they take a long time to show up and are not a one to one relationship.
What is the time frame for transitory? If you say years from now? I can see it, but it's going to be a very bumpy ride regardless.
Good post. Things I watch are inflation rates in other developed countries--they are mostly all also experiencing the same bottlenecks and also experiencing OPEC price increases--and also the dollar relative to their currencies.
We will experience higher prices in industries where we have put in protective tariffs--steel, aluminum, for example--so that might give us more inflation relative to Europe, for example, over time. For those commodities, I would look at programs to modernize existing capacity, which is often put off either because of foreign competition (in the past) or because of protected status (currently). If you are going to use tarriffs, get something in return.
"For those commodities, I would look at programs to modernize existing capacity, which is often put off either because of foreign competition (in the past) or because of protected status (currently). "
That statement doesn't make any sense. If you are subject to foreign competition that's tending to lower price then yes you probably don't want to borrow and then spend capital money on automation for a product that's declining in value. You may well not be able to sell the extra product the automation allowed, and the decline in price may be greater than any savings the automation brought. At the end of the day you may not be able to afford the loans.
However, if you have a tariff, then your profits are higher. This allows you to spend some of the extra profits on automation without borrowing and furthermore, the expected future profits means automation is likely to pay off far more quickly and thus borrowing is less risky.
Jwatts,
I guess you did not understand what I said or you do not understand what oligopolistic firms in markets with government created barriers to entry do.
If you do not understand this comment, I would suggest that you get familiar with antitrust economics or industrial organization. Also, look up Cournot equilibria in oligopolistic markets with barriers to entry or, the equivalent, 25% tariffs. (Hint: firms might not expand capacity or would run existing inefficient plants.) If you believe that oligopolistic firms will invest and expand capacity in protected markets I have a bridge to sell you. That's why conditional tariffs premised on modernization to world standards should be adopted. If you believe they would do this anyway, no harm, no foul.
Once again Bill, when someone points out an error in your thinking you refuse to admit it. In this case, you are moving the goal posts from firms protected by tariffs to "oligopolistic firms".
There are hundreds of steel producers in the US, hardly an oligarchy.
https://www.ibisworld.com/industry-statistics/number-of-businesses/iron-steel-manufacturing-united-states/
JWatts,
Just to add to your deficient knowledge, here are two other sources:
"Last year, Cleveland-Cliffs purchased a majority of the global steel giant ArcelorMittal’s American mills, after buying the struggling producer AK Steel, to create an integrated steel company that owns iron mines and blast furnaces. In December, U.S. Steel announced it would take full control of the Arkansas-based Big River Steel by purchasing the shares in the company that it did not already own. Goldman Sachs predicts that by 2023, roughly 80 percent of American steel production will be under the control of five companies, up from less than 50 percent in 2018. Consolidation gives companies in an industry greater ability to keep prices up by maintaining tight control over production." https://www.nytimes.com/2021/05/21/business/steel-prices-boom.html
There is also similar article in Metal Miner describing EU tariffs and US tariffs and the tightening of prices in both markets separated by tariffs: https://agmetalminer.com/2021/06/23/steel-market-in-us-europe-remains-tight/
When we talk about inflation and fail to discuss the contribution of tariffs to it, then...we delude ouselves and choose to have higher inflation caused by that decision.
JWatts,
I assumed, incorrectly, that you knew the steel industry is regarded as an oligopoly. The piece you cite includes iron and steel industries, fabricators, and vertically related firms. A bicycle wheel rim manufacturer would be included in this "industry" definition when you include fabricators.
Go by NAICS code, and do a literature review where steel is regarded as oligopolistic, and debates center around what interdependent strategies they employ in this concentrated industry: https://collected.jcu.edu/jep/vol23/iss1/1/ Also, you might want to go to Modern Industrial Organization by Carlton and Perloff where they discuss how, when tariffs have been imposed on foreign steel, the domestic industry acted as an oligopoly (an interesting chapter on the effects of tariffs on firm competitive behavior). To be sure, there was, until recently, a world market which is less concentrated and reduced domestic prices. However, we now have a 25% tariff, and if history is any example, prices will rise and stay that way. There is a good, but dated, Indiana university study I will look for which discusses prior tariff responses.
By the way, it is an oligopoly, not an oligarchy.
Sometimes you don't move a post
When you assume the other person
Will not run into it.
JWatts, You might also want to look at this S&P Intelligence piece as well: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/amplified-by-tariffs-high-us-steel-prices-may-collide-with-infrastructure-plans-65498642 This is an example of my claim above that domestic tariffs will contribute to inflation in the US than comparable against Europe.
The "markets" Tyler is talking about include a Federal Reserve footprint of $80B a month in addition to foreign central banks.
"Multiple overlapping temporary factors are arranged to permanently and continually inflate prices, so I have plausible deniability to say that inflation is transitory."
Jesus Christ Tyler, this is embarrassing.
"What is it that you understand about the Fed that the broader market does not
The "broader market" (whatever that is) maybe concerned with an increase in interest rates, but not with inflation per se. In fact, the broader market seams quite happy with inflation that manifests as inflated asset values.
The broader market is not difficult to define: it consists mostly of individual investors, sovereign wealth funds, and pension funds. The first group certainly cares about inflation and the second group arguably does as well. Both are setting aside money to fund future needs and lack of confidence that inflation will stay low and stable would cause them to avoid fixed income securities.
The third group cares to the extent that defined benefits are indexed to inflation. One of the largest pension funds in the world, CalPERS, makes regular cost of living adjustments to its benefits so they certainly have to pay attention to inflation versus the performance of their investments.
All of those actors are very happy with inflation as long as asset prices grow faster than consumer prices.
The topic is the market for Treasury securities. Your statement supports my point: if these market segments start to expect higher inflation, they will shift money out of fixed income assets which will ultimately cause those yields to increase. The Fed has big stakes in the TIPS and long-term debt markets but is still not close to majority of outstanding bonds.
Agree with Tyler here.
Deflation was the bigger concern pre-pandemic. So what's changed?
We've seen stimulus before, both monetary and governmental. I'm no expert but it should be possible for the Fed to manage this.
The great resignation is a more unusual phenomenon. I'm not sure there's been anything very similar to it before but I could be wrong. At some point though, people's ability to fund themselves will drop off and they'll have to go back to work. I guess we might be arguing over whether this takes one year of high inflation or five.
A base-rate analysis suggests when the great resignation ends, inflation will be very roughly what the Fed wants it to be.
So now "transitory" simply means "not hyperinflation?"
Yikes, i would hate to be among the have-nots in this country (don't own financial assets, low labor bargaining power, on fixed incomes, etc etc). The rest will be fine, of course.
I think it's very likely that inflation risk premia has gone up over the past year. Which probably explains a good chunk of the rise in breakevens.
What gives me pause though, is that we're in an new monetary regime (negative real yields, no high powered money) that isn't well understood by the market or the Fed. I.e. I'm not sure anyone really understands why balance sheet expansion is stimulative. This is not to say that runaway inflation is necessarily a foregone conclusion, but I think the risk of a policy error in either direction is elevated.
Interesting post. Probably "correct" as far as these things go.
Add on: If we could have "tight" labor markets for the next couple generations, but at a "cost" of 3% annual inflation...would that be a good trade-off?
I think so.
You're also not appreciating the extent to which treasury yields have become severely manipulated.
Odd that if the Fed does not want high inflation, the strongest policy measure on the table is a tapering, i.e., a gradual decreasing over the next eight months the rate at which it actively contributes to inflation.
The Federal Reserve can control the rate of price inflation.
Wow. So if a central committee of PhD economists can control the rate of price inflation, let's get them to work on health insurance premiums and used cars.
US government debt is pushing $30 trillion. Inflation is the only way regardless of what the Fed thinks.
I agree, but transitory inflation can be a little or a lot. I think what deserves more attention is that stimulus always flows unevenly to some sectors more than others, and the pandemic cycle flows of forced savings followed by splurge spending have similarly imbalanced effects. The much-discussed supply-chain problems are no longer mainly pandemic-induced labor shortages: they are mainly post-pandemic splurge spending particularly on goods.
Active fiscal and monetary policy has done a relatively good job of keeping the average output and income level relatively stable through an enormously disruptive event. But under the surface at the sectoral level there are some sectors struggling to keep up with stimulus and splurging-inflated demand, and other sectors still in pandemic-induced austerity. There are rapid-pace whiplash effects like the lumber panic, and slow-moving whiplash effects (if that makes sense) that will play out over years. Some sectors that are now being prodded into demand-catch-up emergency investment will surely later end up with excess capacity and price-war.
All of this drives up the inflation rate and drags on growth over several years. Certainly it's transitory but I think when all tallied it will be bigger than most people have been expecting.
I'm not saying the stimulus was wrong: I think even fiscal conservatives should recognize that there is a special public interest during a pandemic in keeping people financially secure while staying home.
Even for the long-term rate of inflation there are caveats:
- The Fed's switch from a target of "2 or slightly less" to a target of "an *average* of 2 or slightly less" was significant. It amounts to tolerating somewhat higher long-run average inflation, perhaps up to an extra 0.5%.
- The Fed's hawk/dove balance is likely to continue slowly moving in the dove direction under Biden, and the next chair is likely to be considerably more dovish than Powell. We could conceivably eventually see a slightly higher target rate, though certainly not soon.
- If Trump came back to power all bets would be off. His idea of ideal central back policy is identical to Erdogan's, and it would be hard to resist a blatant autocrat having won re-election.
Since 2020 the Fed is the single largest buyer of treasuries with maturities of over 10-years, buying up to 75% of all new issuance. Because of this the Fed effectively sets the yield on all maturities of > 10 years. The market cannot and will not "fight the fed" so it goes along with whatever the fed is willing to pay. Because of this your main argument falls flat. The market can believe inflation will be non-transitory while at the same time believe a yield of 1.64% is fair simply because it knows the Fed will step in to buy treasuries. Public holding for TIPS has declined since 2020 while Fed holding of TIPS has skyrocketed. This is the same deal. The Fed is the only buyer left and is effectively setting the yield.
In the year 2020 the treasury issued 494 Billion in 20 and 30 year bonds. While the Fed balance sheet of treasuries maturing in > 10 years increased by 413 Billion.
"Since 2020 the Fed is the single largest buyer of treasuries with maturities of over 10-years, buying up to 75% of all new issuance. Because of this the Fed effectively sets the yield on all maturities of > 10 years. The market cannot and will not "fight the fed" so it goes along with whatever the fed is willing to pay. "
There's lots of assets with maturities over 10 years. If investors feel treasuries are overpriced because the Fed is printing money to cover up their collapse due to inflationary expectations, then what about all other instruments? Wouldn't an investor balk at a low yield corporate bond backed by, say, auto loans over the next 7 years if he or she felt they were looking at persistent inflation going forward?
I don't pretend to any real knowledge of monetary economics, so please correct my ignorance: if the central bank has purchased a substantial share of "fiscal" debt, and has not then factored this with some sort of pass-through instrument (e.g. a central bank fixed coupon bond with equivalent maturity to the government obligation it has purchased), and if it primarily sets "the rate of interest" via very short-maturity repurchase agreements or the overnight rate for trading banks, then does not the central bank, by increasing "the rate of interest" in order to subdue inflationary pressure also increase its (sort of the government's, if not strictly in a legal sense) own interest burden (which is now floating)? Does this not effectively drain the fiscal economy/limit the central bank's ability to increase the rate of interest?
Again, apologies if the above is ill-informed.
The Fed only THINKS it controls inflation. This is not your grandfather's FRB! Congress added the mandate of minimizing unemployment some years ago, which gives FRB two goals which can easily be in conflict. The result since has been easy money as the default.
The self-styled "progressives" are already out for Powell's head, do you really believe he will put his own noggin in the noose by raising rates before he has no other choice (& it is too late)? Politicians love easy money & the appointments show it. Humans love cushy, high-paying jobs that command awe & respect, & all the governors are human last time I looked.
The system has been sabotaged from within, so that it cannot act to prevent inflation from getting out of hand.
Monetary policy quite loose and Fiscal policy just more spending and yet probability of inflation in TC view an open question/transitory? And the Fed able to deal with it w/o hitting the brakes and driving up interest rates to highs not seen in recent memory?
Does not seem to square with the historical record so Bayesian thinking might suggest transitory much less probable if at all likely
Why I Remain on Team Bezzleflation into Vicious Correction into Stagflation
2021-10-28 21:37:16| 0 | 0 |
There are two major problems with Tyler's stance, which other commenters have highlighted.
First, it presumes the Fed will act. Given the continuously increasing pace at which Federal debt is growing, the unpopularity of the assured nosedive asset prices will take given even modest belt-tightening measures, and the capitulation of the Fed to the political interests most averse to taking the needed measures, this seems unlikely.
The second issue is the complete misalignment of the price indexes used by the Fed to measure inflation from lived consumer reality. Goodheart's Law is in full effect, and I suspect that work on the margins here is the Fed's true long-term strategy for "addressing" inflation. Sure, those house, gas, electronics, and food prices might rise fast enough to price the plebs out of their lifestyle, but as long as they can tell the right story with their numbers that ends at 3%, what does any of that matter?
Yes, they will have to act eventually, but even a moderate tapering seems certain to be met with a sharp correction > stagflation cycle, so unless the Fed can (pardon the fascist microaggression) "man up," it seems unlikely.
There are over 13,000 cryptocurrencies listed on CoinMarketCap. Over 13,000! ProShares ETF, which began trading only last week, already has more than $1.2 billion in assets under management. Bitcoin is still the top dog: the total value of Bitcoins in circulation is about $1.1 trillion, roughly half of the size of the entire crypto market, which is valued at about $2.47 trillion. But it's volatile: last week Bitcoin reached an all time high of almost $67,000 but yesterday fell to around $59,000. But here's the thing: many observers believe Bitcoin's volatility is a feature not a bug. That's the point of this comment: it's the asset prices, stupid!
Has the level of risk tolerance ever been this high? Has yield ever meant so little? Did the mortality risk of the pandemic convert green eyeshade investors into gamblers? Extremes are the new normal. Even weather extremes: this summer California suffered a severe drought triggering massive fires, but now in the Autumn California is experiencing record rainfall and snow. Eight trillion gallons of water in two days! And then there is the political divide, the extreme right and the extreme left. A religious person might wonder if these are the end times.
Order and stability this is not. Just as extremes are the new normal, so is disruption. Another new normal: the amount of cash in circulation. It soared last year at a rate not seen since 1945. Has the uncertainty of the future caused individuals and businesses to hoard cash? Not exactly a sign we are headed for a cashless economy.
Predictions about the future are hard in ordinary times, but now? There is nothing ordinary about now. Yet Cowen is an inflation dove. To understand why, one must know that disruption is to Cowen what order and stability is to me. See his next blog post. For a better future, go west, young man. Or anywhere other than where you are. Disruption is good.
Crypto is so yesterday.
The new currency is
Tungsten:
"Even in a year that has featured dog-meme cryptocurrencies and rappers shilling SPACs, tungsten cubes stand out. They are as inert as they sound: gray, an inch or two on each side and 1.7 times as dense as lead. A major selling point, according to Amazon.com’s product page, is that they are "extremely heavy for their size."
That also is their main source of appeal to crypto bros and other enthusiasts who caused a run on supplies at a major tungsten provider in recent weeks. They are shelling out around $400 apiece for 2-inch cubes weighing around 5 pounds, or $3,000 for the 4-inch version as heavy as a low-horsepower outboard motor—and almost three times the price.
While cube enthusiasts overlap with aficionados of ephemeral varieties of digital money prone to heart-stopping swings in value, their new paperweights, given their density, are among the most-tangible things on earth. Tungsten has one of the highest tensile strengths and melting points among metals." From today's WSJ.
I have bought
Cowsh*t futures
Because you can use it
In your garden, and can
Get an NFT of your cowsh*t
So you do not have to store it at home.
"What is it that you understand about the Fed that the broader market does not?"
The problem for you Tyler is that anyone who can answer this question for you in a definitive and convincing manner wouldn't want to tell you because then the information would want to release the idea to the world. Had you said that you will keep the information private the maybe someone would be nice enough to tell you.
My point is that the corrolary of efficient market hypothesis which you are clearly relying on means that if you are not in the know then you won't know. Enjoy your ignorance!
Tyler, you should analyze a world in which the Fed doesn’t control inflation and it doesn’t matter which inflation rate THE FED wants. You should first define inflation and then argue for a good measure of it. But you are not going to do it because you still know nothing about the inflationary financing of government deficits.
Tyler, I hope you have learned about medicine in the past 18 months. In particular, about fever. I suggest you to read at least the Wikipedia entry. This paragraph is about history:
"A number of types of fever were known as early as 460 BC to 370 BC when Hippocrates was practicing medicine including that due to malaria (tertian or every 2 days and quartan or every 3 days).[95] It also became clear around this time that fever was a symptom of disease rather than a disease in and of itself.[95]"
What a worthlessly arrogant pile of sludge you are, EB-CH. You know more about the history of inflation that Tyler or some others around here? Offhand it does not look like it. Your big claim is that you have been following Agentine inflation for 70 years. If doing that has not led you to understand that Argentina is not the United States, then I would suggest you are having a dementia problem.