Fed Misses on Inflation, Again

Most economists underestimated the stellar first quarter GDP of 3.2 percent and increasingly doubt their consensus 2020 recession forecast. While we also assumed a softer first quarter, we have remained Bullish on the economy and still  expect no recession the next 2 years as the consensus of economists and CEO’s have assumed. While our crystal ball doesn’t yet see any recession year in the long range forecast, will be watching for a 2 year global reacceleration and new decade high risk ratios before worrying about an economic contraction and market crash.

However, the much bigger story today is the Fed overestimating inflation again, as measured by core personal consumption expenditures (PCE).  The Fed PCE target has been 2 percent since the Great Recession 10 years ago. Two percent is a bit arbitrary, not a magical number where inflation might spiral out of control requiring a panic rush of higher interest rates to strangle the economy. We would prefer the Fed allow 2 to 2.5 percent PCE inflation before gradually tightening the interest rate screws. US inflation data has been decelerating  since 1980. This includes the last 10 years of below normal PCE during which herculean efforts to create inflation have failed. The Fed needs to give up the Phillips Curve ghost as we have written about before. Strong economic growth with very low unemployment does not necessarily mean high inflation. The Phillips Curve was a theory usurped from an economist to explain the explosive inflation shock of the 1960’s and 1970’s without regard for the one time factors of leaving the Gold Standard during the post WWII Baby Boom consumption era. 

We are now near the other end of that 1970’s inflation era that routinely witnessed 5 to 10 percent PCE rates. Now the young boomers are retiring seniors infusing a slower national consumption rate per capita. Our esteemed economists with their keyboards controlling the global monetary system are ignorantly adhering to the idea that labor shortages equal high inflation requiring anticipatory credit tightening. The US and the Western world have not had any worrisome inflation this decade. Our advice would be to take a risk and wait.

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