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Monday, April 18, 2022

The Federal Reserve: This Is A "Time of Uncertainty"

A few weeks ago the post: A Time of Uncertainty was published by the US Federal Reserve. It is a speech made by John C. Williams, President and Chief Executive Officer at the Federal Reserve. The speech was made to an audience in Princeton, New Jersey at the Economic Policy Studies 2022 Spring Symposium.

The most fascinating part of this speech is the title because little in the speech sounds 'uncertain'. To the contrary, the speech sounds all but certain that the 'uncertainty' of today will be gone in roughly two years. 

You always know when an opponent is weak by how they act. Most in power act powerful when weak and weak when strong. You can tell when its the former by the rationale. If the argument sounds delusional, you know they are weak. Such is the case with this speech.

It lays bear the true sentiment of all leaders today -- they have no idea what's going on. In particular, those that lead cartels like the Federal Reserve. So, most leaders are engaged in an act of looking big because they are weak and uncertain about what's to come, but that does not stop them from action. While uncertainty will make the sage stand still, the leaders of today are quick to act. Despite their uncertainty, they give speeches like the one given by Williams at the Spring Symposium. 

Here's an excerpt from the speech, 

In the United States, we are now seeing elevated inflation across many categories of goods and services. Meanwhile, in Europe, which is heavily dependent on Russia for energy, rising prices of oil and natural gas are the biggest concern. And in the Middle East, there are fears of a wheat shortage, given the region's reliance on wheat from Russia and Ukraine.

I sense little uncertainty here. Where it all goes wrong, at least in my estimation, is in the expectation set. They are under the misguided belief that with a few sprinkles of monetary policy, all will be back to normal in a few years. They all believe they can simply kick the same can into the next decade by raising rates. Here's an excerpt from the same speech: 

The one bright spot regarding inflation is that longer-run inflation expectations remain well anchored. This anchoring is seen in both market-based measures of expected inflation and in surveys of households and economists. For example, the New York Fed's Survey of Consumer Expectations has fielded special survey questions on five-year-ahead inflation expectations since 2019, and these expectations have hardly budged since the start of the pandemic. In addition, the pass-through of inflation surprises to revisions in three-year-ahead inflation expectations is about half as large as it was before 2020. That is, medium-term inflation expectations in this survey are less responsive to inflation shocks than they were before the pandemic. 

With regard to "expectations" Williams is referring to the projections put out by the FOMC in the middle of March. And, these projections are based on “expectations”. Isn't this curious? Why are the economic solutions of the day based on the 'expectations of the uncertain'. Where most of us have come to a full stop, the Federal Reserve has interpreted the stop as a sign that all will be well in two years. And, these are the expectations that are being used to steer economic policy. It is bewildering. The bewilderment does not end here.

There is a belief that inflation is being fueled by demand for goods rather than increases in the money supply. Keynesian and other non-monetarist economists reject the notion that inflation can be caused by the Federal Reserve's increase of the money supply via debt monetizing programs like quantitative easing and rampant buy-back programs because to do so would be to admit that they caused the "uncertainty" of today. And, to be clear, that would be okay. It would certainly be preferable to  acting as though the current situation was caused by a lack of supply on goods. Does anyone truly believe, in this technological age of over supply and consumption, that the issue is one of lack? Williams does and goes on to say:

Our monetary policy actions, combined with those of other countries, will help bring demand for labor and products in closer alignment with available supply. As this reduction in demand-induced price pressures takes effect and supply constraints gradually ease, I anticipate inflation readings will begin to decline later this year, although this process will take time to fully play out. For 2022 as a whole, I expect PCE inflation to be around 4 percent, then decline to about 2½ percent in 2023, before returning close to our 2 percent longer-run goal in 2024. 

In other words, all of this is just a bad dream caused by increased demand for goods and services and it will all be over by 2024. Some might even call this delusional. I can only hope that this is his public stance and that privately he's buying commodities and gold for his own portfolio, because it is clear that the inflation that's coming, fueled by our obsession with growth, is not one that can be patted on the head or answered using a Keynesian demand/supply chart. I believe the biggest fear of the Federal Reserve is that the world will come to blame its policy actions on the creation of a long protracted depression for the market.