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All of this growing economy news is great, but still out there, whether anyone wants to admit it, is the Fed in a rate hiking campaign. You can look at the inflation indicators and conclude there is some inflation, but it is not nearly debilitating and it is not growing in intensity.
Inflation could hold steady or even decline, however, and the Fed would not stop raising rates. Why? Because the Fed has once again obfuscated growth and inflation just as it did back in the late 1990’s and early 2000. The Fed has gone from looking at prices and trying to insure long-term price stability (that is its mandate) to looking at potential causes of price instability. If it can somehow cause price instability then the Fed views it as an inflation indicator. It does not have to produce inflation, it just has to get to a level where the Fed believes it can cause inflation. Then it is a threat and rates have to be raised.
That is how in the late 1990’s the Fed came up with all of these inflation indicators everywhere in the economy. Anything that was indicative of a solid economy was a potential inflation trigger, e.g., good wage levels, strong employment, stock market gains, stock market options, consumer spending. None of these are inflation in themselves at any level, and at that time they were not causing inflation because there was no inflation. Nonetheless because the Fed was focusing on anything that could possibly indicate inflation, it started viewing indicia of a healthy, growing economy as implying imminent inflation.
Thus we had a series of rate hikes that grew in intensity even as the Fed drained money supply and the economy was already showing signs of slowing. The economy was still strong, but it was slowing just as it often does during an up cycle. The Fed attacked growth and prosperity as potential inflation, and it hit the economy at the wrong time. It tripped it, and it fell from its lofty heights and we have all paid a high price that we will feel for decades to come (as we gave away much of our technological lead).
Right now the Fed is engaged in raising interest rates with a backdrop of modest inflation. There is more than there was in 1999 and 2000 due to the demand led recovery we have had, but it is not a serious threat and in any event, slowing the economy is not the way to cure inflation. Indeed, many of the indicia of inflation the Fed looks to are signs that the economy could free itself from inflation. If supply can grow at a faster rate as business gain confidence and invest more in their business then inflationary pressures drop.
Moreover, long term rates have not risen. Greenspan says this is a conundrum, but that is likely just double talk, He has already come up with reasons why it does not matter so he can stick to his course of action just as he did in the late 1990’s. He wants to get rates higher to give the next chairman some maneuvering room. Laudable goal, but the problem is he gets frustrated with the lack of progress and then goes too far. Of course, every Fed since the late 1920’s has gone too far and has acted with remarkable similarity. Rates are low because the Fed is raising rates and the bond market is concerned the Fed will overdo it. More than that, there are several billion Chinese who have not really participated in that country’s growth yet. When they do that will exert a lot of deflationary pressure on the world. These are just two reasons bond yields have been lower. Greenspan, however, has an agenda that he will see through. The question is whether the economy will be strong enough to see it through as well and thus whether investors can fight the Fed this time around.
Inflation could hold steady or even decline, however, and the Fed would not stop raising rates. Why? Because the Fed has once again obfuscated growth and inflation just as it did back in the late 1990’s and early 2000. The Fed has gone from looking at prices and trying to insure long-term price stability (that is its mandate) to looking at potential causes of price instability. If it can somehow cause price instability then the Fed views it as an inflation indicator. It does not have to produce inflation, it just has to get to a level where the Fed believes it can cause inflation. Then it is a threat and rates have to be raised.
That is how in the late 1990’s the Fed came up with all of these inflation indicators everywhere in the economy. Anything that was indicative of a solid economy was a potential inflation trigger, e.g., good wage levels, strong employment, stock market gains, stock market options, consumer spending. None of these are inflation in themselves at any level, and at that time they were not causing inflation because there was no inflation. Nonetheless because the Fed was focusing on anything that could possibly indicate inflation, it started viewing indicia of a healthy, growing economy as implying imminent inflation.
Thus we had a series of rate hikes that grew in intensity even as the Fed drained money supply and the economy was already showing signs of slowing. The economy was still strong, but it was slowing just as it often does during an up cycle. The Fed attacked growth and prosperity as potential inflation, and it hit the economy at the wrong time. It tripped it, and it fell from its lofty heights and we have all paid a high price that we will feel for decades to come (as we gave away much of our technological lead).
Right now the Fed is engaged in raising interest rates with a backdrop of modest inflation. There is more than there was in 1999 and 2000 due to the demand led recovery we have had, but it is not a serious threat and in any event, slowing the economy is not the way to cure inflation. Indeed, many of the indicia of inflation the Fed looks to are signs that the economy could free itself from inflation. If supply can grow at a faster rate as business gain confidence and invest more in their business then inflationary pressures drop.
Moreover, long term rates have not risen. Greenspan says this is a conundrum, but that is likely just double talk, He has already come up with reasons why it does not matter so he can stick to his course of action just as he did in the late 1990’s. He wants to get rates higher to give the next chairman some maneuvering room. Laudable goal, but the problem is he gets frustrated with the lack of progress and then goes too far. Of course, every Fed since the late 1920’s has gone too far and has acted with remarkable similarity. Rates are low because the Fed is raising rates and the bond market is concerned the Fed will overdo it. More than that, there are several billion Chinese who have not really participated in that country’s growth yet. When they do that will exert a lot of deflationary pressure on the world. These are just two reasons bond yields have been lower. Greenspan, however, has an agenda that he will see through. The question is whether the economy will be strong enough to see it through as well and thus whether investors can fight the Fed this time around.
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