Well, The Federal Reserve finally got its wish: INFLATION!
U.S. consumer prices rose in July by more than expected on a bounce in auto and apparel costs. The so-called core figure, which excludes volatile food and fuel costs, climbed 0.6% from the prior month, the biggest surge in almost three decades, according to a Labor Department report Wednesday. The headline figure also increased 0.6%, following the same gain in June. The trend reflects a rebound in demand for goods and services from the depths of the pandemic-induced lockdowns earlier this year.
But on a YoY basis, core inflation rose only 1.6%.
But rent inflation fell to 2.8% YoY, the lowest since 2015.
When we think of velocity in economics, we usually think of M2 money velocity.
The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period.
M2 velocity declined during “The Great Recession” as GDP declined. But M2V continued to decline after The Great Recession as Bernanke, Yellen and then Powell continued to flood the economy with liquidity. And then Covid struck leading the US into another recession.
But if we look at GDP/QE (Fed Velocity of Asset Purchases), the picture is even more stark. QE Velocity was over 4 prior to The Great Recession (due to little quantitative easing prior to 2008), but continued QE after 2008 led QEV (or QE velocity) to fall under by 2015 and then crashed below 1 in the Covid recession.
While QE has not generated GDP growth like before The Great Recession of 2008/2009, it has certainly help the top 1%!
The Federal Reserve has a dual mandate: stable inflation and low unemployment. Well, core inflation is currently at 1.2% (core PCE growth is at only 0.95%) and unemployment (thanks to Covid-19) is at 11.1%. Not quite on target.
The Taylor Rule model using an aggressive specification suggests that The Fed lower their target rate to -8.58%.
Of course, Congressional spending is out of control with mandatory spending (entitlement programs, such as Social Security, Medicare, and required interest spending on the federal debt) since the days of George HW Bush and Bill Clinton. And especially post financial crisis.
Of course, mandatory spending on Medicare is soaring out of control.
Defense outlays are projected to grow with non-defense outlays declining,
Of course, the TRUE dual mandate of The Federal Reserve is propping up the S&P 500 index and NASDAQ.
Good luck to everyone trying to cope with out of control Congressional spending and Fed money printing.
The question is … will Congress and President Trump/Biden reign in their prodigious spending after Covid-19 passes?
Here is my answer. Where are the Budget Hawks when we need them??
The Federal Reserve Open Market Committee (FOMC) decided to do nothing, except say that ZIRP (zero interest rate policies) are going to continue for a long time. And that MORE fiscal stimulus is needed. As long as Mayors and Governors continue their economic lockdown policies, more monetary and fiscal stimulus will be needed.
Where does The Fed go from here (given that Covid-19 seems to be growing still)? The implied Fed policy rate looks to be negative by 2021.
Gold is surging as investors figure out that our fiat currency cannot support the reckless spending in Washington DC.
Let’s see what Fed Chair Jay Powell (aka, Thurston Powell III) comes up with. Hint: Fed buying stocks and going to negative rates.
According to the Atlanta Fed’s GDPNow forecast of Q2 GDP, US GDP is expected to sink -34.7% QoQ. With the blistering growth in M2 Money Stock, the result is a historic low below a reading of 1 … at 0.7.
Let’s see where are today. The Federal Reserve is printing money at a rate of 25% YoY. Meanwhile, the Atlanta Fed GDPNow forecast for Q2 is -34.7% QoQ. This will be the WORST M2 velocity is history.
Even worse, the 10 year Treasury yield is near its all time low (orange box). Meaning that mortgage rates are near their all-time low as well.
Meanwhile, The Federal Reserve is merrily purchasing corporate bonds … with the largest two of the top four purchases being German automakers, Volkswagen and Daimler (Mercedes). Japanese auto maker Toyota is at 6th and German automaker BMW is at 8th.
Negative M2 velocity and The Fed buying foreign bonds? Add in Joe Biden’s Federal spending wish list of over $10 TRILLION …
The world’s major central banks aren’t purchasing debt fast enough, leaving almost $1 trillion of new sovereign bonds looking for buyers in the months ahead. The flood of fresh debt, sold by governments to fund pandemic-rescue packages, threatens to dwarf central-bank buying and swamp markets in many countries, according to Bloomberg calculations. By contrast, most of Europe is set to benefit from the European Central Bank’s purchases and may offer the best shelter for investors worried about a potential surge in bond yields.
The Treasuries market alone could see more than $1 trillion in net bond supply in the six months through Dec. 31, and strategists are predicting sales will comprise fewer bills and more longer-dated notes.
So far, domestic buyers have supported U.S. debt. But some of the market’s most loyal investors appear to be stepping away just when they’re needed most. Pension funds typically buy Treasuries to match their long-term liabilities, yet a proxy for their purchases of longer-maturity bonds — holdings of so-called stripped Treasuries — has fallen consistently since February.
With Senator Schumer (D-NY), Nancy Pelosi (D-CA) and Presidential hopeful Joe Biden (D-DE) all screaming for trillions in spending, this will only get worse.
“It is possible, though not certain,” that the Fed will implement yield-curve control, they wrote on the Brookings Institution website, laying out testimony delivered Friday to the House Select Subcommittee on the Coronavirus Crisis.
The Fed has looked into the possibility of capping yields on short- to medium-term Treasuries though policy makers have suggested that further study is needed before deciding whether or not to go ahead.
Yellen told the committee that it would be a “catastrophe” if Congress decided not to continue enhanced unemployment insurance that is due to expire at the end of this month. “We need the spending that those unemployed workers can do,” she said.
Under the program, unemployed workers receive an extra $600 a week. Yellen said the program could be restructured to cap total insurance payments at a fixed percentage of regular income.
In their Brookings posting, Bernanke and Yellen said they expect the Fed to provide clearer guidance on its plans for short-term interest rates as a way to provide more stimulus to the economy.
“To maintain downward pressure on longer-term interest rates, the Federal Open Market Committee likely will provide forward guidance about the economic conditions it would need to see before it considers raising its overnight target rate,” the two former policy makers, both of whom now work at Brookings, wrote. “And it likely will clarify its plans for further securities purchases.”
The Fed has pledged to keep short-term interest rates effectively at zero until it is confident that the economy has weathered the pandemic shock and is on track to achieve its maximum employment and price-stability goals.
The former Fed chairs also called for more action on the fiscal front, including aid to state and local governments and a continuation of enhanced unemployment insurance.
“If the pandemic comes under better control, economic recovery should follow. However, the pace of the recovery could be slow and uneven,” they wrote. ‘’Fiscal and monetary policies must aim to speed the recovery and minimize the recession’s lasting effects.”
Here is a chart showing monetary stimulus AND fiscal stimulus (in the form of public debt).
Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.
“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.
Here is today’s Treasury yield curve versus the yield curve on December 1, 2005. Looks more like wholesale panic to me.