“Supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
By Wolf Richter for WOLF STREET.
Fed officials admitted they’d vastly underestimated the inflation surge, with doubts growing over its “transitory” nature, given the changes in inflation dynamics, including “labor shortages,” supply constraints, wage increases, and blistering demand. These factors might have a more “persistent” impact on inflation, according to the minutes of the FOMC meeting released today.
Tapering the asset purchases might start earlier than anticipated at the prior meeting. The housing market boom, fueled by “low interest rates,” is triggering concerns about “financial stability risks.” And tapering purchases of mortgage-backed securities “more quickly or earlier than Treasury purchases” is officially on the table “in light of valuation pressures in housing markets.”
So here are some salient gems from the minutes of the FOMC meeting.
Tapering asset purchases.
- Tapering may start “somewhat earlier than they had anticipated,” in light of incoming data – a view held by “various participants.”
- It’s “important to be well positioned” to taper “in response to unexpected economic developments,” such as inflation discussed throughout the minutes, or “the emergence of risks,” such as financial stability risks, mentioned later in the minutes.
- “Several participants saw benefits” to tapering MBS purchases “more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets.”
- “Several participants” noted “that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.”
Strong demand v. “labor shortages” and supply constraints.
The term “labor shortages” was mentioned five times in the minutes, along with material shortages, supply disruptions, and production bottlenecks. “Participants” saw these factors “as constraining the expansion of economic activity this year.”
A broad range of industries in participants’ districts were reporting that these constraints and shortages, including the labor shortages, “were limiting the ability of firms to keep up with demand.”
Businesses reacted to this mix of strong demand and shortages in various ways, including by “raising compensation to attract and retain workers” and “raising prices.”
The difficulty in hiring workers likely reflected “factors such as early retirements, concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits,” which “were making people either less able or less inclined to work in the current environment.”
“Many participants judged that labor shortages were putting upward pressure on wages or leading employers to provide additional financial incentives to attract and retain workers, particularly in lower-wage occupations.”
“Participants expected labor market conditions to continue to improve, with labor shortages expected to ease throughout the summer and into the fall.”
In their discussions on inflation.
Participants, surprised by the magnitude of the rise in inflation, “attributed the upside surprise to more widespread supply constraints in product and labor markets than they had anticipated and to a larger-than-expected surge in consumer demand as the economy reopened.”
Participants noted that many businesses in their Districts “had reported that higher input costs were putting upward pressure on prices.” And participants “generally expected inflation to ease as the effect of these transitory factors dissipated.”
“But several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year.”
“Several participants noted that, during the early months of the reopening, uncertainty remained too high to accurately assess how long inflation pressures will be sustained.”
Doubts about “transitory” inflation crop up.
“Some participants judged that supply chain disruptions and labor shortages complicated the task of assessing progress toward the Committee’s goals and that the speed at which these factors would dissipate was uncertain.”
“Accordingly, participants judged that uncertainty around their economic projections was elevated.”
“A substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
“Several participants expressed concern that longer-term inflation expectations might rise to inappropriate levels if elevated inflation readings persisted.”
So there you have it.
Amid inflation that has knocked the wind out of the Fed’s inflation forecast, and inflation dynamics that are persistent in nature, such as inflation expectations, doubts are cropping up even at this Fed that this inflation surge will somehow just go away on its own, while the Fed continues to repress short-term interest rates to near-zero, and while the Fed is still repressing long-term interest rates by buying Treasury securities and MBS. And the Fed is signaling that change is afoot.
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No one believes it.
10 year Treasury yield plunges – now at 1.321%
“Tapering may start “somewhat earlier than they had anticipated,” in light of incoming data – a view held by “various participants.”
No one believed them last time either. Markets are delusional. Remember “QE infinity” that turned out to be very finite?
WF
Will they able to ignore the tantrum from the Mkt like in late 2018 and turn around? They have yet to ‘whisper’ tapering loudly beyond Eccles building! With out Fed, MKT gets shiver and gets lost. They know it and the mkt knowns it too!
They’re being forced into a decision – pick the stock market or society.
Fidelity has an article up explaining why Taper Tantrum this time will be different/muted.
Maybe. Maybe not.
In 2001 , I checked we had housing price decline as well, I simply checked Zillow price history on different local properties In LOs Angeles.
For me it sounds like it does not matter if we have higher lending standards. If market is tanking , there would be a domino effect that will effect prices everywhere.
Last time , the decline were caused by housing bust, this time it may be caused by something else , but it will have its effect on house prices.
However since there is housing shortage, the price reduction may not be as severe as before. Any thoughts wolf?
There is no house shortage where I live but since they’re all turning into vacation rentals and second homes there is a significant housing shortage and affordability crisis.
There will be far fewer second homes and vacation rentals when the bear market returns for real, starting with the bond market. Indeterminable whether it ended last March or not.
Either tax land, not labour, or watch your country get even worse.
Henry George was right, Friedman said it was the least worse tax.
Reagan had a very simplistic view, which is why he was selected.
@ Wolf –
Are they not still buying bonds and treasuries?
Fed is giving us false signals….there treasury purchases will increase and so will there balance sheet. All talk. They can put on a little show of tapering but they will quickly pull a U turn….BS going to 20 trillion, Treasury purchases of 120 billion are going to 250-300 billion!!!!
With 10 yr yield at 1. 32%, where is the inflation? If there is ‘real’ inflation the yields go up although many claim this is due to suppression by Fed.
The inflation currently is due to supply chain disruption in chips but lumber keeps going down. JETS an ETF I am following is consistently down. So are the hotels (BEDZ) reastaurants ( EATZ) cruise lines CRUZ (CCL, RCL and NCLH) are sloping dowbwards. Recovering economy is faltering! What the Bond mkt is forecasting, is in contradiction to MSM narrative!
“Where is the inflation?”
Have you been shopping in the last year?
exactly. It is everywhree.
I bought some Powerade at a convenience store. The Store only opened up about 8 months ago. The sign said 2 (32 oz) for $4.
I bought 2 and when I got in my car I thought the bottle looked smaller. The bottle said 28 oz. The did not raise the price but they made the bottle smaller.
a 1/2 gallon of ice cream is 1.5 pints now. Not a 1/2 gallon.
That’s the inflation diet. The fed is going to help you tighten your belt while they lighten your wallet.
It is not inflation!! The downsizing of food products is the super secret method of the Amer Med Assoc trying to combat the American obesity epidemic. ;-)
The bond markets are being manipulated by the Fed. The inflation is real. Time is running out for this to continue.
The Fed is draining liquidity through RRP and paying interest on reserves while creating it through continued asset purchases. How is it manipulating the 10 year yield? Brownian motion?
Captain Peachfuzz from Rocky and Bullwinkle was a better navigator. Rename the Eccles Buildingbtge S.S. Guppy.
“The Fed is draining liquidity through RRP…”
Let me make the counter argument. Investors voluntarily put their cash into a money market fund managed by Fidelity (for example). Fidelity takes part of that cash and “invests” it in the overnight reverse-repo market so it can pay the investors a positive interest rate.
Liquidity is not being drained in these transactions because the investors still have immediate access to their cash in the money market account. The reverse-repo rate is 5 basis points. Interest rates on T-bills up to 12 months pay slightly more than so it seems unlikely that financial players will dump a lot of T-bills to get the RRP rate.
RRP acts like a giant Fed-sponsored money-market fund where other money market funds can park their cash to get 5 basis points. This interest rate is too small to drain much liquidity from the market.
jrmcdowell,
When the Fed hands out cash (repo, QE), it creates that cash it hands out. That is how it creates liquidity.
When the Fed takes in cash (RRP), it destroys that cash. That is how it reduces liquidity.
It doesn’t matter what the motivations are of the participants and counterparties, this is the effect.
Inflation allows the Government to pay back sovereign debt in cheaper dollars. Unfortunately, this is done on the backs of the vast majority of the working class to the benefit of the investor class.
Wolf, respectfully disagree. RRP doesn’t destroy cash, it’s sitting in the investors’ money market accounts. RRP is being used by the money-market fund managers to earn 5 basis points on that cash. If investors deployed enough cash out of a particular money market fund, then that fund would have less of a need to use RRP.
Because so much cash has been created, the Fed produced this vehicle so that short-term rates wouldn’t go negative. And since RRP pays such a small interest rate, it’s not going to drain liquidity from the markets.
You need to read up on central banks and cash. When a central bank takes in cash by selling an asset, such as a Treasury security, it is the reverse of QE.
That RRP cash that the Fed took in is gone. It won’t reappear until the Fed buys back the Treasury security.
Central banks create or destroy cash as they buy or sell assets. That’s just how it works. That’s why central banks are different than any other economic entity.
Yes, you’re welcome to spread your bizarre theories on Twitter.
Today 10y yield is 1.297%!
Recovering economy?
Inflation in assetsd, housing, stock mkt , healthcare ad education!
Reckoning day is approaching! Check those ETFs I am just monitoring above!
Bought the puts on BA!
Now with free money starting to dry up. We may not see the fast inflation we experienced the past year but maybe slower inflation (disinflation)?
I am pretty sure Starbuck and Chipotle will never lower their prices.
r8
In the 70’s, inflation ran 12 to 18 months after the ‘action’ that caused it, that would mean what happened Jan-March ish 2020 should be what’s causing current inflation. It’s like punching a guy on the nose and waiting a year till he hits you back.
I can’t see why now would be any different to the 70’s in this regard so it will be interesting to see how subsequent ‘insanity’ will feed through over the coming months.
“With 10 yr yield at 1. 32%, where is the inflation?”
Manipulated interest rates are an indication of what?
Manipulation….and intentional interference with free market forces.
You seem to be looking for a normality….and normality from 1974 to 2009 was that the Fed would keep Fed Funds even or in excess of the inflation rate. So, the Fed should have Fed Funds parked somewhere north of 3%…..but they are still QEing….
They do the exact opposite of the financial history of Fed policy …
they loosen and inject with 5% inflation….
To look at the rates resulting from their manipulations as an indicator of what would be if they retired and withdrew is folly.
Perhaps low bond yields reflect an expectation that inevitable and necessary tightening by the Fed is going to collapse the current asset bubbles.
YS
I think low bond yields show there is still far too much cash around so the Govt can carry on borrowing cheaply.
Wonder where the cash came from, couldn’t be QE could it?
‘Wells Fargo cancelling all consumer lines of credit.’
Now that is tapering.
Well WTF did the Fed expect when they’ve been deliberately trying to stoke inflation with trillions of dollars in QE since 08/09…notwithstanding their brief periods of tapering. And they succeeded in stoking considerable inflation in the big four expenditures…Housing, Vehicles, Education and Health Care over the past decade, despite the bogus hedonically adjusted CPI and PCE numbers published over that time period. They created this Frankenstein…now they’re going to have to deal with it. Good luck…
No, the Fed isn’t going to deal with it. We are!
The tyrany of the dollar.
OPEC+ discord threatens oversupply of the most important inflation-driving commodity aside from labor.
Oil glut is very deflationary, and the bond market is reacting to this.
“In the past year the combined QE of the EU plus the Fed went from $8.3 Tr to $17.4 Tr. That is massive economic stimulus and rate suppression. It is estimated by the Fed that for each $ 1Tr of QE in the US, there is a 50 BP reduction from what would have been market interest rates. So, $4 trillion of QE by the Fed equals 200 BP of rate reduction. If inflation is running at 3%, and then there is 2% QE reduction, then real Fed Funds rates are around 500 BP negative. QE is completely distorting the bond market. That is driving a lot of the stock market growth.”
anonymous
Historicus – you just said something analytically profound that I had not seen admitted by the FED. That for each $1 Trillion of QE, there is 50bp reduction in the interest rate that would have obtained had we not had such QE. When did they say that? Could that be used as a roadmap for how QT will play out?
They are in a good position to pull back if they want to. The banking system is drowning liquidity at the moment, the banks might enjoy seeing some dry land.
“with doubts growing over its “transitory” nature…”
Talk about shutting the barn door after the cow’s already out.
I’m sensing incompetency. At least I hope that is all and not intentional.
The cow isn’t just already out, it’s been dead in the pasture so long it has rotted away, and all that’s left is a skeleton picked clean by vultures ages ago.
It is their job to be abreast of this. Someone fell asleep at the switch.
It’s all psychological.
Even after the final statistical analysis people will use their emotions to fill the gaps.
The Fed is completely on the ball.
They now have enough patsys lined up to cover any outcome.
It’s transitory unless it’s not.
All time high valuations of assets pose a risk for losses, etc.
They can now let nature take its course, and do what they need to to keep the wheels on the bus, and whatever happens they’d ‘seen it coming’ and have the tools available to deal with it.
They’re terrifyingly smart. Or at least consistent.
As Wolf notes earlier, it’s the markets that are delusional and act like goldfish with a 5 minute memory.
Greed replaced by fear in a matter of moments.
Unless you are Jim Comey, it’s hard to read the ‘intent’.
I give Fed the benefit of doubt in terms of intent. Its actions can be plainly explained away as hubris and God complex.
“Its actions can be plainly explained away as hubris and God complex.”
Yep…DC does try to run a much more centrally planned economy than it ever likes to admit to…although it relies primarily on the blunt, imprecise tools of interest rates (manipulated via injections/deletions of money supply).
But that reliance on interest rates (and god knows I’m not advocating for more direct intervention) leads to horribly imprecise outcomes.
I’m fairly sure that the Fed has been waiting since 2003 for a halving of interest rates to lead to…
1) A halving of mortgage payments on a doubled number of $150k homes built by twice as many employed builders
and for 17 years it has instead gotten,
2) The same number of homes built, by no more employees, but at twice the price of $300k.
Yippee, what a triumph of central control.
But because the Fed basically one has one big green button…it has kept mashing that same button for 17 years.
We should replace landlord tax breaks with homebuilder tax breaks, and let investors adjust.
Give them some credit; they are just academics with little life experiences. How are they supposed to learn when living in ivory towers.
So what happens next?
The $64,000,000,000,000 question!
Its intentional and criminal.
100%
Elitist money flow is a rigged game and always has been. The fed are the government watchdogs that keep it running in their favor.
Stable prices, 2% inflation and maximum employment are the staple mandates, dogma, cliche. Yet in a swirl of smoke it means nothing. We stand for this…ephemeral cypher logic.
“Hey dude…Chairman…why is 2% inflation allowed?” “Your stable prices are Wolf Street WTF”.
Accommodative lending, transitory and participants are the repeated buzz words. Did I mention repeated – like a KISS song lyric from the early 80’s.
The market recovery from the pandemic has recovered – it has prospered. The stock indexes are up…like a Valley girl would say “it’s crazy up”. This “recovery” this “recession” has been the the greatest bull market ever!
Are the “participants” at the meeting from the methadone clinic? Or are they troubled bankers?
“Hey Chairman dude…what about the participants with a 401k who want to raise a family in Tulsa. Is my mortgage gonna GFC and the 401k gonna fold like a lawn chair when you grasp the reality?”
Vaccinations are apparently a key economic input. What about the wind direction and humidity…those in my opinion are more meaningful. Diabetes is more worrisome than COVID – how about a shut down to thwart that?
I would bring up curing “stupidity” but that might bring upon my own demise.
Thanks Wolf!
Lick It Up?
J. Powell. World champion in three weight classes. Bonds, Stocks, Housing. Let’s see if can do it in gold as well.
Gary
Mandate #1 The Fed is supposed to promote maximum employment yet what they do with rates has had the OPPOSITE EFFECT. The free money to promote inflation is borrowed by the federal government and paid out in a fashion that discourages employment. Fail.
Mandate #2 The Fed is supposed to promote stable prices, yet they promote just the opposite, INFLATION. Fail
Mandate #3 The Fed is supposed to promote moderate (not extreme) long term rates, but we have near record lows, 30yrs almost 2% below inflation. Those rates are IMMODERATE and EXTREMELY low. Fail.
J Powell …. breach of Fiduciary responsibility in his post as Fed Chairman,
Well, I won’t quibble with your eloquent exposition of the the Fed’s three mandates but for historical purposes, wasn’t #2 the original mandate and #1 added later? Not sure about #3, historically. Agree they are failing on all three. As someone near retirement, the fail on the third mandate is relevant and painful. I used to respect the Fed for its professionalism and independence. The latter have been impugned. But with what would we replace it?
Whether we agree or disagree here, one thing is constant and true, we all pay attention. Most of the public doesn’t, and the financial mess coming down the pike is going to catch most folks off guard and will be particularly painful for low to middle income folks.
And retirees with Pensions, 401k type plans, over inflated assets like houses… oh my…
Great point. I don’t always agree with the conclusions of Wolf or the commenters, but those of us who read WolfStreet are by definition the 1% who are interested in all that is posted about here. Auto industry, Fed Balance Sheet, Inflation, Trade Surpluses, Cryptocurrencies, Housing market, commercial real estate markets,… and all the rest.
But LOTS of Americans are simply going to be surprised at what is coming down the pike. I feel for them.
Yep. I am seeing a lot of people people 35 – 50 living pretty high standard of living all depending on dual incomes continuing to keep it afloat. Don’t think they are ready if recession hits.
Think of how stupid the whole FED pretense is: “Hey, we’ve got an economic crisis developing. I know, let’s make everything SUPER expensive so that it’s almost impossible for the masses so survive financially!!”
Unfortunately, they really have no control over this, now. Once the snowball began rolling downhill it developed a mind of it’s own.
Agree strongly. Transitory inflation with no timeline or specified amount turns out to mean very little…
In automotive I expect the inflation to be sudden and dramatic once the semiconductors show up, if not sooner. The rest of the supply chain will need to deal with labor shortages and high raw material costs, pass that on, then it will get passed on to new cars. Not much to suggest that used car prices should come down anytime soon either.
After all the inflation there will have to be a period of deflation, for it to indeed be transitory, and how bad or how long that period will last noone really knows.
But without the free/spare money, and possibly more expensive debt, who’s gonna be paying?
If everyone consumes less then the economy will shrink.
Let’s see how inflationary that is.
Tom S.
“Transitory inflation”
Notice never a question on when “transitory” becomes something else. How long does it last until the Fed must declare it something other than transitory?
Oh for some honest questioning of the Fed.
“Don’t fight the fed”. Don’t need to, the markets will trip them when they least expect it, and time slows down like in the Jim Morrison song. First leg to break will be the bond market, and QE loses it’s mojo.
Depth…
add in..
We will PUNISH anyone who saves their money…. by keeping rates at zero, and promoting inflation and even allowing a 5% inflation.
“If you go to work, earn and do nothing more…..we will rip 5% a year off your current wages and any past wages you might have saved”….your central banker
While the stimulus was being handed out like candy, I was posting on this blog that it was destroying the standard of living of the masses. But people like Petunia told me they were glad to have the money to buy a new mattress or whatever. Are you happy now?
My $1,400 stimulus check disappeared into a Dental bill for over $1,400 for a dental implant after insurance. There’s been a lot of coincidences like this lately. I got the stimmie check the same day as the dental bill arrived.
I look at the stuff I buy with my extra, and concluding I am buying things I need. These are things I put off for a long time, or did without. I have two vehicles combined age of 50. Maybe next year one of those new hybrid 20K PUs.
You kidding DC?
When government mandates a shutdown, it is obligated to compensate for the lost pay. Stimulus checks didn’t cover the loss of livelihoods, those checks didn’t cover childcare costs.
If was done correctly, stimmy checks would have cost less than 0.4T, not 6T.
Nacho, please cut the rhetoric. Yes, some people, mainly small businesses deemed non-essential and landlords whose properties were unconstitutionally seized by the government, were badly harmed. But many were not. Many people worked comfortably from home. Other businesses got PPP loans they didn’t need and pocketed the money. Other people were laid off and received unemployment far in excess of what they made.
There was ZERO justification for the unemployment exceeding salary, EVEN if your place of employment was shut down, and there was ZERO justification for just printing and handing out $4,000 per person irrespective of lost income.
The retail charts showing people splurging on durable goods proves that. People who were struggling would not have used the money to buy iPhones and TVs.
The lesson here is that you can’t print $4 trillion and hand it out without consequences. Period.
You are bringing up anecdotes and then generalizing them.
When you say ‘many’, do you have a distribution chart? What percentage of people lost their jobs vs just worked from home? What percentage of people made more money collecting unemployment than their original paycheck? What percentage of people who are splurging never lost their income?
Stimulus payments were overly mismanaged. Payment in 2020 was based on what a person made in 2018, not on current situation. Government spent $6T (mostly on special interest groups) instead of the less than 1T needed to send stim checks.
To the main point, I stand by it. If government wants to demolish your house to build a highway, it needs to compensate you. If government stops you from evicting non paying tenants, it needs to compensate you. If it stops you from earning your income, it needs to compensate you.
They’re not anecdotes; we have the data! At the peak, the unemployment rate was around 15%. That means that 85% of people did not lose their jobs. There was no reason for those people to get “stimulus.” The government published data that around 2/3rds of people on unemployment made more than their salaries. This was when the “enhancement” was $600/week instead of $300/week, so the number presumably dropped.
You know, the funny thing about the government, it’s very liberal with our money. In the most egregiously stupid ways.
For example, if the US decides to leave Afghanistan in a rush, it should be smart enough to police all of the equipment and ammo and stuff and bring it home instead of leaving it there for someone who might hate you to take.
The BBC reporting on the idiotic method in which the withdraw was handled is just one more piece of evidence why our government should be be put on a diet as far as budget is concerned. I’m surprised those guys didn’t leave a few nukes lying around.
Hmmm, the operative word here, NL, is “done correctly.”
When was the last time our idiotic government did something correctly? These are the same people that rush through insane bills that no one bothers to read. 6T is so that everyone can get bailed out, from public unions in Illinois to the retirement funds for teachers. Oh, and let’s not forget to throw in some pork while we’re at it, drug testing for horses… Geez
Our government is run by morons who are too imbecilic to look past the first order effects if they get that far, or by a bunch of crooks who don’t give a crap about any effect as long as they stay in office.
Just look at Gavin, he is busy handing out checks left and right because he doesn’t want to be recalled. Personally, I don’t want this recall effort to happen, why?
Because as much as I might dislike Newsom, I think whoever replaces him will be worse. And also, because he is forced into fighting this recall (the first thing I saw on Youtube a couple days ago was a minute long ad from Newsom fighting recall), he is going to give away money like crazy (see the idea of making landlords whole with back rent… geez, if only you didn’t go through this eviction moratorium BS in the first place) to stay in power.
I remember a time not so long ago, when every facet of this country wasn’t so corrupted with politics.
Agree completely. It would have been best if G didn’t intervene – determining who or what is essential, creating moratoriums, shutting down schools etc.
But given that G did step on individual’s rights and their livelihoods, it’s imperative the victims are compensated.
“When was the last time our idiotic government did something correctly?”
Off the top of my head, they had the southern border under control a year ago.
Right-i would posit that the ‘equitable’ factor is due to the very wealthy having an insufficient number of ‘expendable’ lives to man very many divisions on their own when the time arrives-and sooner or later, it always arrives…
may we all find a better day.
Actually I was glad to get the money, and I expect they will send out more. Things are bad out here for many and those of you who are playing into the politics of resentment don’t have a clue. If you didn’t qualify because your income is high and your bubble is still intact, watch out. The bubble that will be bursting is the one keeping you safe.
BTW, since you seem to be interested. I still don’t have the new mattress. Every time we get close to having the money something else comes up. Needed tires, car repairs, dental work, bed broke, etc. We were grateful to get that money. If you think this hurt the economy, just wait and see what happens when people have nothing to lose.
Petunia, the point here is that you may be glad for the $, but it may be simply offset by inflation elsewhere. Look at your annual spending, add 10% to it for inflation…are you really ahead after the stimmy?
She refuses to acknowledge it, Gattopardo. I don’t get it, because Petunia seems like a smart gal.
Depth,
I love Petunia’s comments.
From what I remember she lost out in Great Recession and never fully recovered. It could have happened to me, but I had already gotten divorced and jettisoned all my financial commitments so there was no panic selling, just austerity til crisis passed.
Gatto,
What you don’t get is that inflation already was hitting me long before the stimulus money arrived. My grocery bill had already doubled in the years before covid, my credit card interest rate was ~30%, and our income went up 1% a year in the 5 years before covid. The stimulus didn’t make any of that worse, it made it better.
What the stimulus has done is exposed the resentment of high earners towards lower wage earners. To me the stimulus was a refund of my tax dollars, nothing more. High earners are always talking about lower taxes, well the stimulus lowered my taxes. How come that’s bad for me but good for you?
Petunia, if a group of people stole from us because we had more, we wouldn’t consider it legitimate. I don’t consider it any more legitimate when done through the voting system.
Those of us who make high incomes, but not super high, don’t get any of the benefit of the tax code, but we pay 40% of our income to taxes. And we don’t get any “stimulus.” So our 40% is 40%, while the average person who pays 5% gets it dropped to 2%.
That’s why we don’t consider it a “tax cut.”
RNY,
It’s hard to sympathize with your argument when the 60% of your income left after taxes is probably a lot more then 100% of mine before taxes. Your attitude that you shouldn’t have to pay anything is also disturbing.
The specifics are irrelevant. The fact is, no one has stated why it’s equitable for those who make more to pay much more as a percentage, other than the fact that they get outvoted.
Theft through the taxation system is still theft.
“What you don’t get is that inflation already was hitting me long before the stimulus money arrived. My grocery bill had already doubled in the years before covid, my credit card interest rate was ~30%, and our income went up 1% a year in the 5 years before covid. The stimulus didn’t make any of that worse, it made it better.”
— I do get it. You’re missing that your grocery and whatever else bills are growing from added inflation.
What the stimulus has done is exposed the resentment of high earners towards lower wage earners. To me the stimulus was a refund of my tax dollars, nothing more. High earners are always talking about lower taxes, well the stimulus lowered my taxes. How come that’s bad for me but good for you?
— You’re making an elegant point here (not about resentment, about the stimmy = tax cut). The problem is that no one’s really sure if tax cuts create more purchasing power. FYI, personally, I have always thought tax cuts should come from the bottom via raising the income level at which taxes kick in. The Trump cuts could have been used to raise that threshold to $50k+. But as noted, even that may just create more inflation in the goods purchased by those who benefited most, wrecking the utility of the cut. But at least yachts would be cheaper. :-)
Right-missed thread, see my post above Pet’s rejoinder. Apologies.
may we all find a better day.
Yes, pretty happy here. Doing great actually, stimmies were a real boon. Thanks for asking.
Your math is fuzzy.
Hi,
Love your insights. Only reason the Fed might be nervous is that raising rates will hurt the profits of the member banks. They should be nervous.
The Fed never gets nervous. They make us nervous instead!
Simple example I heard is there is so much long duration debt out that even a slight increase in rates is going to start blowing stuff up. I think it’s going to happen,ight as well get the show on the road.
Plus been seeing a school of thought that Fed policy last dozen years actually was counter productive as bank loan growth has been disappointing.
Does it do system any good to allow people to finance their debt at lower rates as one person’s interest payment is another person’s income?
DM
Banks usually make more money the higher the rate is.
Fed has tons of other things to make it nervous but, I think, the ‘big one’ is Fracking which turned USA from a net energy importer to a net exporter again. Only problem is, at any interest rate at all, fracking is non-viable and eats money.
Imagine your trade deficit for the last 12yrs if you’d had to import all that fracked energy on top of all your other imports. Bite the bullet, is the Fed’s only ultimate option, otherwise they are putting off a trip to the Dentist.
1) Inflation isn’t transitory, valuations are insane.
2) Side by side : the raging mania is over. Buyers strike. Applications
dropped 8%, below 2019.
3) JP will get a second thought after looking at the data on Wolf’s charts
Nervous ? I say it’s a fine mess they’ve gotten us into Stanley….(Oliver Hardy).
It’s often said that “the cure for higher prices is higher prices” as far as lumber and other things go. We will see how that works out for certain things. I know this: I am on a total buyer’s strike insofar as a new vehicle is concerned. Call me “out of the market.” I’m not playing the game. Instead, I am cutting my driving to the bone. Don’t want to put more miles than necessary on my older vehicle.
Piggy backing another comment, I always get quite the chuckle when news media bemoans the deep “recession” we’ve been in. As if. I’m making 1.7x the money from my last job, anyone with a house has taken a HELOC or gotten carried away with frivolous spending on toys because they “have the equity.” Anyone in the stock market for more than a couple years has made an utter killing. Wages are skyrocketing at the bottom level. People simply are choosing not to work and mooching off the .gov.
Hardly a recession. Wonder what they’ll call it if it all goes tits up in another year and this once in a lifetime pandemic actually causes an earthquake in the aftershocks. Literally every single working class American I know is burning money. Even people who I used to call frugal have dumped money into new vehicles, swimming pools, UTVs etc. The loose off the hip with money types look like they are cut rate MTV cribs rejects. I’m utterly and completely baffled how in the hell these people are getting the money for this crap. Lots aren’t even working. WTF indeed.
I’m not fearful because I doubt this will be the end of the US economy or that I’m going to get hit hard but I’m stacking back every dollar I can in the bank and working as much overtime as I can get. I’ll be honest, I’m getting nervous. No more fast food runs or days at the trap range for the past few months. Thinking of scaling back even more.
When the shoeshine guy is giving you stock tips, you know the market top is just minutes away. Selling a fart for big money is the 2021 shoeshine guy stock tip analogy.
In 2006 my painter and his waitress wife bought a 600k house in one of the scariest hoods in town. This was his second home. Good people but no income and no idea how to manage real money. Within two years it all went kerplooey. Remember the strippers in Florida bragging about how many houses they owned? This isn’t the same, but neither is it different (if that makes sense).
David…
I hear the shoeshine guy is bullish on biotechs, right?
or SPACs?
remember that the average IQ is 100, that means 50% have an IQ of less than 100..
New vehicles are expensive to maintain, insure and any repair not covered under warranty…
If they ‘aren’t working’ then where is the money coming from.. $2,000 really isn’t a lot of money in 2021 to spend on depreciating toys.
and these people (“your friends”) are seriously burning it by using it for swimming pools so you don’t have to be jealous
wages are skyrocketing at the bottom level.”
First, hourly wages going from say $12 – $16 an hour is hardly ‘skyrocketing’. Next prices are also ‘skyrocketing’ at the everyday level so the wage increase for most has been a wash (BLS own figures confirms this)..
So wages are skyrocketing at the bottom level but people are choosing not to work but instead mooch off the .gov?? I don’t understand that logic.
I have been seeing signs everywhere up here in Maine offering $19 – $20/hour pay. The “hiring signs” that popped up everywhere last fall have not gone away.
Maine tourism relies on imported workers. Similar story for most coastal tourism areas. Covid has really put a damper on that resource. US needs more immigration now, not less. The crisis at the border is really a labor shortage, not some kind of brown invasion.
In other words… the irony of the rabid anti-immigrant right promoting wage inflation among the lowest paid workers, is not lost on all of us…
So we have the Fed…..keeping rates LOW to promote “max employment”….but it is having the opposite effect. The Federal Govt takes that “free money” and doles it out in a fashion that discourages employment.
Left hand, right hand thing.
A cul du sac of idiocy.
1 or 2% interest rates would not, IMO, have an impact on employment demand…..but it sure would turn off the free money spigot to Washington.
I’ve been a bottom feeder making 10 bucks an hour. When I got another job at 15 that was an ungodly massive pay increase for me at the time. I sit and look back and wonder why in the world I would ever work for that little of money but hey, only other option was crime or moving. I moved because poverty sucks but at the end of the day, wages at the bottom are jumping dramatically. Now whether or not any of the bottom level jobs are being worked and that extra money is hitting the bottom class is anyone’s guess.
Either way, anecdotal evidence isn’t a great statistic but it gives you an idea what’s going on at the ground level. Everything I’m seeing? This just seems like a bad combo of people living in denial or just being blind and throwing away every extra dollar they pull in from this whole ordeal. But that’s Americans for you. Blind consumers.
It’s happened repeatedly in the past. Why wouldn’t it happen again?
Trucker Guy
Just glad to hear you (and others) are benefitting from lower end wage increases. They have been a long time coming.
When pandemic UE ends in earnest, folks will be getting back into the lower end market, along with a huge number of immigrants, legal or otherwise. Those who worked vs taking UE will have locked in wage increases. Inflation may catch up to you eventually, but at least you have a head start.
Keeping your eyes / ears into Wolf Street will also give you advantages.
I’m not at the bottom end anymore. If anything the lower wages increases have hit me disproportionately. The cost of everything is going up but wages are stuck where I am. I’m making more because of changing jobs and moving across the country. Union didn’t try and increase our wages. Went into contract negotiations, said .25 cent an hour each year for the next three years. That’s a tough pill to swallow when I can go to the local hardware store and make 19/hr stocking shelves as opposed to 23/hr spending half the week traveling and living on the road.
Who knows, maybe we’ll make a union against the union? Even still though, I’m scalping every last dollar I can and holding it so compared to a pitiful 15 an hour, I’m still way better off. Just wish pulling 40k lbs of surging oil in snow capped mountains gave you a bit more reward than some slacker stock boy phoning it in and getting to go home every night.
Hourly wages going from $12 -> $16 isn’t “skyrocketing?” That’s a 33.3% increase!
There is an article on CNBC today describing a national petition with 2.5MM signatures asking for more stimulus checks.
After my recent dental surgery, bone graft, and coming in September dental implant, all of which is costing this old guy on Medicare about $7,000 out of pocket, I could use another stimulus check!
Have you thought about just pulling all the teeth and getting dentures? It would be a lot cheaper in the short and long term.
Mine cost $8,000. Ins paid $2,000.
You need a medical savings account to cover these type of things
DC: “Have you thought about just pulling all the teeth and getting dentures? It would be a lot cheaper in the short and long term.”
I know this comment by you was sarcastic, but no, my real teeth are good…it was just an infection above a tooth that had a dead root that caused all the problem. Result was an extraction, gum surgery, followed by a bone graft, to be followed by an implant. Costly, and Medicare covers nothing.
I know I could have gone to Mexico to have this done for less money, but it would have taken three or four separate trips.
SC: “You need a medical savings account to cover these type of things”
Well, tax deductible HSA’s are not allowed for people on Medicare and over full retirement age if my memory serves me right.
“…anyone with a house has taken a HELOC or gotten carried away with frivolous spending on toys because they “have the equity.” Anyone in the stock market for more than a couple years has made an utter killing.”
I notice you didn’t mention crypto. :-P
Because most people I know who bought Bitcoin lost their shirts buying at the peak. Funny how that works.
People who can’t remember how to get into their email most days suddenly have figured out how to get rich by buying Bitcoin because MSNBC ran a news piece on it being the next big thing. Then after the early adopters have paid off news media to hype it, they cash out. A dollar from a million eh?
I don’t see any more of that “buy the dip” and “to the moon” chatter on Twitter. It’s more like, “I made $50 and 6 hours!” The hype machine looks very weak right now.
Here comes the Kabuki again.
Bad cop Bullard will come on tomorrow complaining about “inflation”. Profit taking ensues among market participants.
The next day, Good cop Powell will totally discount all statements from Bullard. “Rates will be accommodative until at least 2023, bla, bla”. Markets will rally again.
I mean they’ve pulled this a billion times by now. No Action Talk Only.
That’s their biggest tool – JAWBONING. The real question is why anybody listens to their nonsense. They’re like The Boy Who Cried Wolf, only much worse.
It’s not just jawboning though. They do purchase a whole ton of MBS every month.
Depth
If you remember the story, the boy was eventually right
PLease repeat after me: FED is not going to taper if it adversely impacts the home prices or other asset valuations.
The usual steps are: Taper First then raise rates.
They’d try to taper but they’d need to reverse it because of adverse reactions.
Unfortunately there is nothing we can do about it just talk about it .
Sound familiar ? lots of talk with no change , Only those in power can control things .Currently Those with huge amounts of Real property like some president’s & Real estate trusts have huge Gains and are not about to change that until forced to. However what’s left is simply that , gone and left. Talk about it is good in the Long run but still we have only what’s left.
The Fed Heads had to be hit in the noggin with a Louisville Slugger the size of Manhattan, but even these thick-skulled knuckleheads are starting to get the message. Someone recently wrote: THE FED IS GOING TO PANIC! You can almost smell fear in the air. Head for the foxholes, readers.
Tapering MBS purchases will be mostly symbolic out of the gate; the market is too large in monthly trading to have $40 to $60 Billion dollars in additional supply have that much of an effect. Remember the Fed’s primary tool is jawboning and advance announcements of its market operations.
A BIG SHOE IS ABOUT TO FALL ON THE MORTGAGE MARKETS AND SEQUENTIALLY THE STOCK MARKET AS YIELDS HEAD BACK UP TOWARD REALITY. How many bank trading departments are leveraged long the bond markets??? The one-way bet on lower and lower yields into infinity is about to go sour. One can say, however, that it will be just a continuation of the trend that began last year to higher yields, the 10-year Treasury being a prime case in point.
Jerome Powell is a coward who let grow illegaly this markets as never before, with his arrogance and ignorance have created a big monster, hoping finish his term kicking the can.
The JP coward guy will be met by angry citizens then
The Fed has been providing “emergency support” to the economy since 2008. When it tried to reduce asset purchases and to raise interest rates, the markets tanked and it promptly reversed course. The same thing will happen now. The Fed will tolerate inflation but it will not tolerate a reversal of the wealth effect. Inflation would diminish the debt burden of households, firms and governments; asset deflation would bankrupt the large speculators who operate with the implicit guaranty of the Fed and the Treasury. So it is a no-brainer for the Fed.
Watch the DXY. It’s at 92 and change today. Back in 2008, it fell to 70.
The FRB is not going to inflate to infinity and have the USD completely collapse. I don’t know where the critical level is, but at some point, pursuing current monetary and fiscal policy will threaten USD status as reserve currency and endanger the imperial project.
Neither are going to occur just to support the financial markets (for elites which mostly lack real influence anyway) or to pay for bread and circus for the public. The public especially will be thrown under the bus, as usual.
Don’t be so sure. Self interest rules. If the rich can derail the Fed’s plans for their own self interest, they will. Many nations have fallen due to the greed and short term thinking of the nobility. They know they have the power to derail the tapering and they have already proved that they will do so without hesitation. They will want to be bought off which will cost everyone else much of whatever they gained while the Fed had primacy during the pandemic. The rich don’t care if it is a small ghetto or a nation spanning ghetto. It’s all the same to them. Ah, ya gotta love the rich…or else.
Adding infinite, artificial, and misdirected money products (LSAPs on sovereigns) while remunerating IBDDs (inducing nonbank disintermediation, synonymous with secular stagnation), results in an excess of savings over real investment outlets, generating negative real rates of interest; eventually has a negative economic multiplier; stokes asset bubbles, exacerbates mal-investment; aggravates income inequality, produces social unrest, and depreciates the exchange value of the U.S. $.
(“It is the real interest rate that affects spending”, pg. 19 Marcus Nunes and Benjamin Cole’s “With Market Monetarism – a Roadmap to Economic Prosperity”).
Whereas the activation and discharge of monetary savings, $15 trillion in commercial bank-held savings (income not spent), of finite savings products (near money substitutes), increases the real-rate of interest (+ R *), produces higher and firmer nominal rates, is more potent (affects real variables), increases the velocity of circulation, has a positive economic multiplier and supports the exchange value of the U.S. $. The 2013 Taper Tantrum is prima facie evidence (my “market zinger forecast”).
Are you also Salmo Trutta?
The Fed should have started tapering MBS months ago. It doesn’t have any business playing sector favorites in what’s supposed to be monetary policy in the first place. But when the housing market so obviously doesn’t need the help – and is arguably being harmed by it – it’s just irresponsible. The only good news here is some of them realize that.
Just because there is a modest inventory increase in just after an extreme multi year inventory low point is means absolutely nothing.
Fundamentally, thanks to 2008 era housing policy, there is a serious shortage of single family properties and the inventory reflects that.
Add low mortgage rates to a housing shortage and surprise surprise …
A good deal will be very hard to come by … for an extended period.
The real villains of all of this are the supply side economists and politicians who pushed for lower taxes and cutting regulation, which only led to sector consolidation and the decay of our industrial base.
Huh??? Lower taxes and reduced regulation did not erode our industrial base. If anything it preserved it for longer by lowering the costs those businesses/industries faced.
What did undermine our industrial base is a pig-headed belief in “Free Trade” which shipped our industries overseas to nations (e.g. China) that had absolutely no intention of playing by the rules. Economists have models that tell us that Free Trade where one side is blatantly cheating still works out for both sides… but Experience tells us that it doesn’t work that way in real life.
Remember when we stole all those trade secrets that England had. For some reason, we thought that China would not be that capable.
“In trade wars of 200 years ago, the pirates were Americans” Google that.
Apples and Oranges.
First off, Americans in the 1790s were not requiring that Britain give up its trade secrets, production designs, and actual industries in order to do business with America. That is EXACTLY what China has been doing. Running your entire industrial base on pirated copies of Microsoft software is a bit different than hiring people familiar with the design of machinery to build some in America. Nor should we forget that America and Britain in the 1790s were by no means allies, friends, or partners.
Secondly, the biggest way that China has been cheating at Free Trade has nothing to do with intellectual property. They are keeping their markets closed to our goods and services (through a variety of schemes) while enjoying wide open access to our markets. Our politicians spent almost two decades assuring us that once China was brought into a “rules-based trade environment” that eventually they would obey the rules. That hasn’t happened.
Hmmm… I gotta say that I find these FOMC meeting minutes to be somewhat reassuring. The comments Wolf highlighted (particularly about inflation) are spot on… and for once the Fed doesn’t seem too far behind the power curve in identifying the economic problems coming up.
That said, there is a VERY LARGE DELTA between identifying the problems and doing something about them… to say nothing of doing the right thing about them in time for that right thing to have a beneficial effect.
Lets face it. If the Fed stops printing money and pumping up the financial markets the whole system will collapse. Then we will have riots like the summer of 2020. Its as simple as that. No need to over analyze all this financial data that is coming in. They will keep doing the same thing until they can’t don it anymore.
Just got my annual report from my BNY Mellon muni bond fund. They said in bold print that the high income clients didn’t lose one dime as a result of the pandemic. In fact they benefited. What does that tell you?
The Fed is just following a formulaic Marvel movie script. Nowadays if something works, apply it everywhere and shrilly beat it to death.
Uhoh, looks like a economic crisis.
Don’t worry, The Fed has mighty powers to protect the economy.
But look, things are getting worse that we thought.
Don’t worry, we will flood the economy with money.
But look, inflation is raging.
Don’t worry, we will flood the economy with more money.
But look, the economy is stagnating, poor getting poorer, rich getting richer.
Don’t worry, there are lots more things we will do in the future that will fix everything.
But look, Time magazine has the Fed staff on the cover with “Fed Heroes make everyone in the country at least a millionaire!”
BTW, don’t look at the background where the country and the world are in ruins. It seems the Fed Team was actually Team America.
“America, F**k Yeah! Commin to fix the motherf**kin day!”
UK is having a significant COVID spike and they are fairly vaccinated. Delta variant is making its way and all. I hope this doesn’t cause Powell to falter in his decision to start thinking about thinking about tapering, or whatever.
You don’t have to look so far afield to see that problem… Missouri and Arkansas are showing signs of a real Covid problem, and it’s only early July.
I don’t trust these guys anymore. I am in Canada and I doubt they will raise interest rates much if at all in the next 18 months to 2 years. This is why I decided to call it quits and tired of paying for lost of extra money for gas, car insurance, work related clothes, other expenses, wear and tear on my 6 year old vehicle, CPP, OAS, union dues etc.
I figured all and all about saving $9,000 a year on all this stuff just which is really $13,500 of my annual employment income just to go to work. This is why I found a break finally on interest rates took my RRSP’s, LIRA’s, TFSA’s which is 80% of my net worth and put it in a fully FSRAO deposit insured credit union.
Tandia Credit Union is paying a guaranteed annual simple fixed rate 2.5% or 2.628% if compounded for a 5 year term deposit/GIC and this will allow me to finally retire 18 months earlier at 63.5. As I am living debt free 15 years now and will live off my early CPP pension, small severance package and interest from all my term deposits/GIC’s.
This will bring in $51,000 for the nest 18 months until I turn 65 and will have my OAS pension then which make my yearly income of $32,000 a year and no more high expenses and hassles to go to work.
That sounds refreshing. Enjoy it.
Finally a person that has had enough and now can really stop and think about his life. My uncle was too aggressive in stocks, mutual funds back in 2008 to 2009 and never fully recovered.
The mutual funds had high annual fees of 1.45% to 1.65% a year also made him way behind the eight ball by 20%. He had to go back to work only prior retiring for 2 years. The lowering of interest rates on savings accounts, CD’s, US and other government bonds was really a trap to make the small main street investor take way more risk than they ever needed.
My grandfather retired with his savings, CD’s and social security in the 1980’s and had more than enough money every month even with high inflation during those years. People used to have more common sense and critical thinking when it came to their lives and families.
I retired in November 2018 and bought a bunch of 10 year CD’s 3.25% to 3.5% with my brokerage accounts. I knew they would not raise rates too much. The $4,500 a month interest, social security income is more than enough for me in retirement.
I remember I used to have 7.5%+ 10 year CD’s back in 2000. Here we are 20 years later and nothing close to that now.
These Fed governors need to go back to CORE inflation.
“Long-term” (Notes and Bonds) Treasury yields are strictly a reflection of what “Short-Term” Treasuries will yield over that time frame.
The fact that we are seeing a 1.31% 10-year Treasury yield means that the market anticipates “short-term” rates to average 1.31% over that time frame.
This means either of two things. Either the market believes that the inflation we are now seeing is indeed transitory and we will be entering another prolonged deflationary episode quite soon, OR the market believes that regardless of inflation, the Fed will NEVER be able to raise rates materially without completely crashing the entire economic/monetary system.
My money is on the latter.
Something will force the Fed’s hands and I can’t imagine it will taker more than ten years!
Another interesting thought is how the US will fund operations and interest payments on the MASSIVE debt. Read that currently 2/3 of the $29T interest is being held in 3-5 year instruments. That leads to very low interest payments. When they roll those into the expected interest rates is collapses the entire CBO fantasy.
We shall see how they plan to fund operations if interest was to hit a higher number and what the plan for the government debt will be. Higher taxes, higher inflation and…
BM
As I see it ‘low yields’ at any duration are caused by too much cash chasing too few investments. In other words asset values are higher.
Where does all the money come from, couldn’t be QE could it?
QE should be illegal, it is a trick to hide debt monetisation from non-insiders.