Calamity Jay Powell Ditches Transitory Inflation Tag, Paves Way for Rate Hike (Compare To Volcker’s Record)

Calamity Jay Powell is no longer mentioning “transitory” when it comes to inflation, but does Powell and the FOMC have the moxie to ACTUALLY raise rates more than a smidge??

(Bloomberg) — Team Transitory is throwing in the towel.

In a clear sign that the Federal Reserve is shifting to tighter monetary policy, Jerome Powell — who’s spent months arguing that the pandemic surge in inflation was largely due to transitory forces — told Congress on Tuesday that it’s “probably a good time to retire that word.”

The Fed chair, tapped last week for another four-year term, still thinks inflation will ebb next year.

But in testimony before the Senate Banking Committee, he acknowledged that it’s proving more powerful and persistent than expected, and said the Fed will consider ending its asset purchases earlier than planned.

A number of economists are forecasting cooling inflation next year, which gives Powell an excuse to NOT raise rates, other than just a bit.

For a little history, inflation was rampant in the 1970s and early 1980s. Fed Chair Paul Volcker, all 6’7 of him, raised the Fed Funds target rate (white line) to 20% on several occasions. The result? Inflation cooled from over 14% in 1980 to 2.46% by 1983. But since 2008, Fed Chairs Bernanke, Yellen and Powell have been the ANTI-Volckers … keeping the Fed Funds Target rate near zero for the the most part and adopted their gut-wrenching quantitative easing programs that are still here today.

Of course, Powell could do what Volcker did (and the Taylor Rule suggests) and raise their target rate to 15% to cool inflation.

But does Powell and the other FOMC members have the moxie to really cool inflation? Frankly, no. Powell until yesterday played the TRANSITORY card and still believes that inflation will cool by 2022.

True, the Federal government has binged on borrowing (up 172% since January 2009). And with Biden and Congress trying to spend trillions more (much of which will be added to the public debt rolls, so increasing interest rates ala Volcker is very problematic.

And then there is always the good ‘ole excuse not to raise rates if needed. Other than admitting that The Fed is monetizing Federal government spending to which there is no end in sight.

Given Fauci’s alleged strong belief in “science” he could play Esqueleto in a remake of Nacho Libre.

Calamity Jay? Powell Weighs Faster Tapering of Bond Buys Amid High Inflation (Market Pukes, Dow Drops 500 Points, West Texas Crude Drops 6.56%)

Calamity Jay Powell testified in front of the US Senate Banking Committee. He rattled markets by going hawkish about inflation, then gave The Fed an out by playing the COVID CARD (the latest Omicron Variant). Aka, the DEATH CARD.

Federal Reserve Chair Jerome Powell said the strong U.S. economy and elevated inflation could warrant ending the central bank’s asset purchases sooner than planned next year, though the new omicron strain of Covid-19 poses a fresh risk to the outlook.

“It is appropriate, I think, for us to discuss at out next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” Powell said Tuesday. “In those two weeks we are going to get more data and learn more about the new variant.”

Powell made the comment in response to questions during a Senate Banking Committee hearing in Washington. The Fed is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November; policy makers next meet Dec. 14-15, where they could make a decision to accelerate the tapering.

On his remarks, the stock market puked.

Well, if Powell followed the Taylor Rule, he would really scare Congress with raising The Fed Funds Target Rate to 14.94% based on an inflation rate of 6.20%.

And then we have HOUSE price inflation of near 20%. But The Fed doesn’t consider than inflation.

Then we have oil prices retreating -4.59%. Not, not due to Biden releasing the National Petroleum Reserve (NPR). Rather it is FEAR of The Fed raising rates and a corresponding slowdown in economic growth.

Calamity Jay Powell.

How The Banking Crisis And Covid Lockdowns Killed Money Velocity (Death Of King Dollar)

I have written numerous times about nothing has been the same since the housing bubble burst and ensuing financial crisis of 2008. The crisis led to bank bailouts (TARP) and banking legislation (Dodd-Frank) giving The Federal Reserve even more power. And then the COVID lockdowns led to even MORE power for The Fed. And a horrid decline in money velocity (the ability of printing money to increase economic growth … or GDP).

But let’s take one step backwards. One the causes of the housing bubble that burst was President Clinton’s infamous National Homeownership Strategy that encouraged “partners” with the Federal government to soften underwriting standards for mortgage lending, particularly for minority households. The intent was to increase the homeownership rate in the US and it worked! Too well. Along with increasing the homeownership rate came rising home prices, culminating with home price growth reaching 14.5% YoY in September 2005. Only to start slowing to a crash.

Of course, the housing bubble was associated with no/low documentation and subprime mortgage lending. But the relaxing of underwriting standards by the National Homeownership Strategy helped fuel the no/low doc and subprime lending crisis. But weakening underwriting standards to increase homeownership rates is a dangerous strategy.

Note the surge in M1 Money Velocity (GDP/M1) starting in 1994. M1 Velocity grew until Q4 2007, then crashed along with home prices. The second and more sudden crash in M1 Velocity occurred with the COVID outbreak in March 2020 and the ensuing economic lockdowns and the intervention of The Federal Reserve in terms of money printing. M1 Money surged 173% from October 2008 to February 2020 and then another 369% from March 2020 to today. THAT is a Fed Storm Surge!!

M2, the broader definition of money, has not grown as rapidly as M1, but it still grew at an alarming rate. Atlanta Fed President Raphael Bostic blamed inflation on COVID but not The Fed’s insane money printing or government lockdowns. C’mon man!

Finally, the banking crisis (and TARP bailouts) along with COVID have made consumer purchasing power of King Dollar even worse.

Be careful of government strategies to make housing more “affordable” because they seem to make housing more expensive and can help crash the financial system.

Bitcoin Retreats 20% From All-Time High as Risk Assets Slump (Dow Retreats Almost 1,000 Points, Gold Advances)

It has been a grim Friday. The Dow fell 900 points, 10Y Treasury yields fell 16.1 basis points and West Texas Crude fell to $68.17.

Bitcoin tumbled 20% from record highs notched earlier this month as a new variant of the coronavirus spurred traders to dump risk assets across the globe.

The world’s largest cryptocurrency fell as much as 8.9% to $53,624 on Friday during London trading hours. Ethereum, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.5%. On the other hand, gold rose as cryptos fell, then retreated as cryptos rebounded.

A new variant identified in southern Africa spurred liquidations across markets, with European stocks falling the most since July and emerging markets also slumping.

The Dow is down around 900 points … and look at Europe!

The 10-year Treasury yield is down 16.1 basis points. Most of Europe is down around 8-9 basis points while the UK is down 14.5 BPS.

And West Texas Intermediate crude futures are down to 68.17 from 78.39. No Jen Paski, this isn’t due to Cousin Eddie (Biden) releasing the Strategic Petroleum Reserve (SPR).

Maybe it was all the tryptophan released by eating turkey.

A day to remember.

Post-Thanksgiving Indigestion: Inflation And Another COVID Scares Spooking Markets (Dow Futures Down 777 Pts, US Treasury 10Y Yield Down 11 BPS, Oil Drops 7%)

Thanksgiving has come and gone. But Americans have a lot to be scared about: inflation (turkey prices were up 24% according to the Farm Bureau and a new COVID outbreak B.1.1.529 — has been identified in South Africa.

Gut-wrenching inflation is already priced in, but yet another COVID outbreak (and the possibility of more economic shutdowns, more vax mandates and more stern lectures from Anthony Fauci) are spooking markets.

Down Futures are down 777 as I write this note.

The 10-year Treasury yield is down 11.2 basis points.

And West Texas Intermediate crude prices are down 6.62%.

Joe Biden: “Save the neck for me Clark!”

Renter Misery Index At 17.42% With Traditional Misery Index At 10.80% (Biden Says $5 TRILLION “Build Back Better Boondoggle” Will Relieve Inflation Over 10 Years)

Renters in the US are getting clobbered by inflation.

The US Zillow Rent Index All Homes YoY + CPI YoY is one measure of renter misery.

The classic misery index (CPI YoY + U-3 unemployment rate) is 10.80%.

Then there is inflation in food prices, gasoline, heating oil, natural gas, etc.

While Biden is releasing the Strategic Petroleum Reserves (SPR) in order to mitigate the problem that he created by terminating the energy pipelines and oil/natural gas drilling permits in the name of “Going Green!” But on the announcement of tapping the SPR, crude oil futures actually rose.

But never fear! Biden claims that his $5 TRILLION Build Back Better Boondoggle (BBBB) will ease inflation … over 10 years. And he claims that “17 Nobel Prize winners in economics have said that my plan will “ease inflationary pressures.”” I sincerely doubt that any of them actually read the 2,500 page BBBB. Rather, they likely just read the White House talking points and said “Hey, that sounds good!” Mo money, less problems?

Here is Joe Biden breaking the legs of America’s renters. Or is that multi-millionaire Nancy Pelosi?

Biden Picks Powell Over Brainard, 10-Year Treasury Yields Rise (10Y-3M Treasury Curve Rose From 83 BPS At End Of 2020 To 160 BPS Today)

President Biden nominated Jerome Powell for a second term as Fed Chair and nominated Lael Brainard as Deputy Chair to replace Richard Clarida. The US House of Overlords (aka, the US Senate) will hold hearings on the nominees (with Elizabeth Warren opposing Powell and supporting Brainard’s nomination).

Treasury yields jumped and U.S. index futures signaled a continued selloff in technology shares as traders pruned bets for a dovish-for-longer Federal Reserve after the renomination of Jerome Powell as its chair.

Contracts on the Nasdaq 100 Index fell 0.3% after Monday’s last-hour selloff in technology stocks. The subgroup was the worst performer in Europe Tuesday, sending the region’s benchmark to a three-week low. A currency crisis deepened in Turkey, with the lira weakening past 13 per U.S. dollar. Zoom Video Communications Inc. lost 9% in premarket trading on slowing growth.

Investors are reducing expectations for a deeper dovish stance by the Fed after Powell was selected for a second term. The chair himself sought to strike a balance in his policy approach saying the central bank would use tools at its disposal to support the economy as well as to prevent inflation from becoming entrenched.

Fed rate hike premium is added after Powell confirmed as next Fed Chair:

Change in Fed’s interest-rate target implied by overnight index swaps and eurodollar futures.

Fed Bank of Atlanta President Raphael Bostic said Monday the U.S. central bank may need to speed up the removal of monetary stimulus and allow for an earlier-than-planned increase in interest rates.

Translation: Markets are pricing in MORE hawkish Powell over uber-dove Brainard. The 10-year Treasury yield has risen from 1.52% to 1.65%

And the 10Y-3M Treasury curve has risen from 83 basis points at the beginning of 2021 to 160 basis points today. I will this the Biden Inflation Effect (BIE).

Let’s see if Powell & Company deliver on removing the excessive stimulus from the market, particularly with midterm elections approaching.

T-R-O-U-B-L-E! Apartment Rents UP 33% Over Past Year, Food UP 33%, Heating Oil UP 89% And Gasoline UP 61% (Affordable Housing Policies??)

The Marty Stuart/Travis Tritt song “This One’s Gonna Hurt You (For A Long, Long Time)” seems appropriate for the plight of the middle and lower income classes in the face of high inflation. How do you spell the combination of President Biden’s policies and The Fed’s inaction on inflation? T-R-O-U-B-L-E … for the middle and lower income classes.

Over the past year, since the election of Joe Biden, the household consumption bundle (food, rent, heating, gasoline) have all risen dramatically in terms of prices. Food is up 33%, heating oil is up 89%, regular gasoline is up 61%, and effective apartment rents are up 33%.

Meanwhile, the 1% are sitting high on a mountain top obvious to the pain caused by The Federal Reserve and Biden Administration. Here is the growth in wealth by the 1% since the housing bubble burst and financial crisis compared with the bottom 50%.

A problem facing renters is the rapid growth of home prices particularly since the COVID epidemic. At least M2 Money has “slowed” to 12.80% YoY while home prices are raging at almost 20% YoY. But hopefully home price growth will slow with declining M2 growth.

Compendium of Fed Chair Jerome Powell and President Biden on vacation.

Is The US At Full (Realistic) Employment? If So, Why Isn’t The Fed Raising Rates?

Is the US at full employment? That is, is the US at REALISTIC full employment? And if the US is at realistic full employment, why is The Federal Reserve keeping rates at 25 basis points??

Let’s start with the “quits” data. An estimated 3% of American workers quit their jobs in September, the Bureau of Labor Statistics reported last week.1That’s the highest percentage since the BLS started keeping track two decades ago.

Front-line and low-wage workers are leaving at rates higher than historical norms while higher-paid office workers aren’t. College-educated workers haven’t been quitting or dropping out of the workforce at higher rates than before the pandemic, but less-educated workers have.

The quits rate in professional and business services was just 0.4 percentage points higher in September than before the pandemic in February 2020. In financial activities it was unchanged. In the information sector, made up of telecommunications, publishing, broadcasting, motion pictures, software and most internet companies, the quits rate was down 0.3 percentage points.

The biggest increases in quit rates were in sectors such as leisure and hospitality where office workers are few, working remotely seldom an option and wages low. Within manufacturing, the quits-rate increase has been much bigger in lower-paying nondurable goods (of which food manufacturing is the biggest part) than in higher-paying durable goods.

In particular, fast food restaurants are offering above minimum wage salaries to attract workers. Burger King was even offering college tuition (not to University of Chicago, but to the local community college).

Labor force participation crashed with COVID and has struggled to recover, despite the staggering monetary stimulus. If this a sign that the US is at full employment (or very difficult to entice workers to enter and stay in the labor force)?

Speaking of colleges, business schools in particular, here are the top 85 business schools in the US according to Bloomberg/Business Week. I had the honor of teaching at University of Chicago in the 1990s which is currently ranked at #4.

I saw this headline this morning: “More Americans Than Expected File for Jobless Benefits.” Odd since so many jobs are available.

I guess Johnny Paycheck’s “Take This Job and Shove It” is the new national anthem under Biden.

Slipping Into Darkness? Inflation + Growing Recession Probability = Stagflation?

Is the US slipping into darkness?

The smoothed US recession probability just rose to 44.40%. Meanwhile, the CPI YoY rose to 6.24% YoY.

The Fed has been lowriding rates since late 2008.

Why can’t The Fed be friends with the middle class instead of just the top 1%?

Playing “Cisco Kid” to chill.