Is the Fed playing poker with inflation?
Abraham George Macro View
Yesterday was the Fed meeting and once again there was no concern from the Fed about any inflationary pressures. If you have been long enough in the markets you surely know this is not for real. Many are really confused.
Massive deficit spending has been unleashed on the markets already. Now we have a president looking to wholesale change an economy, and an aligned Congress ready to rubber-stamp anything coming from the President’s desk. If $3 trio of fiscal stimulus wasn’t enough last year to plug the gap of economic losses from the pandemic (the simple math says, it easily was as the excess mostly went into equity markets) , we have another $1.9 trio in process, over $2.3 trio being drawn up for ‘infrastructure and now $1.8 trio proposed for families’. We are going to be in a sea of liquidity.
Add to that, the Fed itself has created money out of thin air to buy a variety of assets and bloat up bank balance sheets. This is increasing the quantity of money and the ease of access to money, and it’s all far beyond what is necessary to respond to an emergency economic situation. What will be the net result of all this? The money in your pocket will continue to become worth less.
We have already seen that translate into much higher prices for homes, cars, metals, lumber, food, oil you name it. The Fed continues to put a brave face and says that they don’t see inflation as a problem. They do admit, that in the near term we will see some inflation that runs above their target of 2%. But they want us to believe that it will be temporary. For that matter they have been already preparing the public for this from last year.
Powell is trying to explain away the inflation. He said inflation numbers are going to be huge compared to last year’s shutdown economy. From the ‘base effects’ he could be right. The numbers could look huge in a ‘reopening economy’ when compared to a virtually closed economy of a year ago. He also admits that there are ‘bottleneck effects’ from the supply disruption. Again he’s right. He claims it will normalize as the supply constraints ease. It’s all short term. Is it really?
What about the trillions of dollars of excess spending being dumped into the system? That’s the inflation question that people are looking for answers. It was asked in yesterday’s press conference. Powell dodged the question and didn’t answer it. So what can we conclude? The Fed very well knows the inflation tsunami that is coming, but they don’t want to discuss about it. At this stage, it is not going to help. In fact it could be harmful.
As Ben Bernanke once said ‘monetary policy is 98% talk and only 2% action’. They don’t want the economy to get crushed, not just as yet but very soon they will be chasing inflation. Since there are no significant changes in the four asset classes that we follow, we will cover them in the upcoming report.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.