The Fed’s Inflation Confidence Game

A recent article from Breitbart discusses the current state of inflation in the U.S., emphasizing that it is worse than it appears. It highlights the Federal Reserve's need for greater confidence that inflation is moving sustainably towards a 2% target before considering reducing interest rates.

Recent data show inflation rising, with personal consumption expenditure (PCE) price index increases signaling accelerated inflation rates. Goods inflation is pointed out as a significant concern, particularly the reversal of previous disinflation trends in durable goods. Services inflation has also soared, further complicating the inflation scenario.

The article suggests that the Federal Reserve's confidence in inflation reduction may be unfounded, indicating a potentially prolonged period of elevated inflation rates. For a detailed analysis, you can read the full article here.

The Unavoidable Reckoning Ahead

When we inquire, "What's changed?," two subtle dynamics become apparent: Risk and consequences: the effects of the Federal Reserve's 14-year policy error known as ZIRP, or zero interest rate policy, are finally becoming apparent in undesirable ways. Risks are rising internationally in a multifaceted self-reinforcing way.

A phrase commonly used to characterize the multi-decade decline in global hazards between 1990 and 2020 is "The Great Moderation." The financial markets responded by demanding less of a risk premium on the price of bonds and credit as geopolitical tensions subsided and China's entry reduced labor and production costs, effectively suppressing inflationary forces. This gradual decrease in inflationary pressure and risk led to a gradual reduction in yields and interest rates.

Both inflationary pressures and global dangers are currently increasing. China's period of exporting deflation has come to an end due to its inflationary monetary and fiscal policies, which have increased salaries and costs. Finally, there are repercussions from the Federal Reserve's 14-year suppression of interest rates to almost zero, which opened the floodgates of credit. Unfavorable demographics, changes in global supply chains, depletion of resources, and other factors make it impossible to contain inflationary pressures.

A number of asset bubbles were also inflated by the Fed's misguided ZIRP policy, as those who had access to the Fed's essentially free money bid up income-producing assets. This was the result of a behavior-modification program that lasted for ten years and encouraged excessive leverage and speculation, which drove asset prices into a parabolic rise.

The result was the "wealth effect," which has long been thought to be a primary objective of the Fed: when household wealth soars, the top 10%, who possess the great majority of financial assets, undoubtedly feel richer. People who were living paycheck to paycheck took advantage of reduced interest rates to accrue debt through credit card debt, auto loans, student loans, and other loans.
Together with the public-sector borrowing explosion, federal and municipal government spending also surged. Extremely cheap borrowing costs encouraged public and private spending binges.

The current state of the economy depends on historically low interest rates, or it will implode. However, the stagflationary forces that have been unleashed by the Fed's 14-year policy blunder cannot be contained; worse, the Fed's typical "fixes"—lowering rates and saturating the economy with liquidity—actually stoke the flames of stagflation.
In the event that global uncertainties and stagflation persist, the Fed will need to hike rates rather than cut them. Alternatively, private capital will compel the Fed to act by demanding greater risk premiums regardless of the Fed's actions.

Keep in mind that rates are only within the 3% to 5% long-term range. However, even 5% rates are catastrophic for the economy, a fact that is currently being obscured by the explosive growth of both public and private debt as well as the doomsday spending that follows—spending borrowed money carelessly.

But tomorrow is coming, so speculation and leverage that only made sense in a fantasy country of ZIRP will collapse, burst the asset bubbles of speculative mania that created the wealth effect. The feared reverse wealth effect will result from this, making the wealthy feel poorer and less inclined to take on debt and spend carelessly.

Remember that every dollar that has to go toward principal and interest payments on your debt means that you aren't getting to spend that money on things like food and entertainment. Hence, growing rates ultimately undermine consumer spending. Reducing rates, ironically, will increase inflation, which has the same result of destroying customers' purchasing power and diminishing the amount of products and services they can afford to purchase.

Debt saturation occurs when borrowers reach their maximum borrowing capacity; they are unable to borrow further money due to a lack of collateral or income, and as interest rates rise, they cut back on their expenditures. Stagflation is when there is no actual growth but prices are still rising due to rising risks and inflationary feedbacks.

Policy errors have consequences. Read more here.

Iran-backed Houthi attacked ship sinks in Red Sea

A ship attacked by Yemen’s Houthi rebels has sunk in the Red Sea after days of taking on water, officials said Saturday, the first vessel to be fully destroyed as part of their campaign over Israel’s war against Hamas in the Gaza Strip.

The Houthi attacks have impacted transportation in the vital canal for freight and energy supplies from Asia and the Middle East to Europe, which is when the Rubymar sank.

Numerous ships have already steered clear of the route. Due to the sinking, there may be more detours and increased insurance costs for ships using the waterway, which might raise worldwide prices and have an impact on assistance supplies to the area.

The Red Sea could sustain ecological harm due to the fertilizer load and fuel leakage from the ship, as previously cautioned by the U.S. military's Central Command.

The internationally recognized government of Yemen's prime minister, Ahmed Awad Bin Mubarak, described the ship's sinking as "an unprecedented environmental disaster."

The Houthi rebels are still capable of carrying out big attacks in spite of more than a month of airstrikes spearheaded by the United States. This includes the assault on the Rubymar and the tens of millions of dollars downing of an American drone. The Houthis, who have gained international notoriety and infuriated the Arab community at large, maintain that their strikes will not end until Israel ends its combat operations in the Gaza Strip.

Just a quick heads up to remind you about the piece I shared on how the Houthis are shaking up our inflation battle. I dived into the whole situation with the Red Sea crisis and how it's causing a spike in shipping insurance, which in turn fans the flames of inflation. It's a pretty interesting angle on the broader economic challenges we're facing. If you missed it, definitely give it a read to see how global tensions are adding more heat to our inflation woes. You can check out the full story right here: How the Red Sea Crisis Fuels Inflation Through Shipping Insurance Hikes. Stay informed, because it's all interconnected!

For more details on our update for this week, visit Breitbart.