Jawboning Inflation

When the administration and some on Wall Street ask for Fed rate cuts with stocks near the highs while boldly proclaiming how wonderful the economy is, you know something is up.  We think that underlying it all is the knowledge that the Fed has left us with nowhere to go after having blown the biggest bubble of them all.  We can’t remember a time when so much stock-supportive jawboning took place on an almost hourly basis by so many different parts of the establishment including pols, central bankers, the media, and the Street. 

The odd juxtaposition of patting oneself on the back about the economy (which ain’t that great in reality) and blaming the Fed for growth not being better might have cost Trump in pushing for a quick end to trade negotiations.  The Chinese figured out that he must be  worried, or he would not sound so urgent about needing the Fed to cut rates and do more QE. 

The President’s intense focus on the stock market makes it easy for China to figure out how to cause the man some pain.  Trade tensions hurt stocks.  Why not play hardball and wait for the next U.S. election after voters get hit with his tariffs?  Does Trump really think China pays them?  U.S. businesses and consumers do.

It’s gotten even more bizarre in the last few weeks on the Fed’s war against low prices front.  If “Whip Inflation Now” or WIN buttons were popular in 1974 as the cost of living skyrocketed, we’d guess a new rallying cry is in order now like “Let Them Eat Cake.” 

The new enemy of “low inflation” allows the central bankers to ease policy if they want and that’s a big reason for its creation, pure and simple.  In addition, the Fed wants to help inflate government liabilities away by paying them off in debased future dollars.    

Hiding true inflation in carefully concocted government data has been a constant theme for decades.  Twenty years ago, the deciders changed the way that housing costs are reflected by not looking at actual home prices.  They “derive” a number based on rents.  We kid you not. 

A recent cover of Bloomberg Businessweek asked, “Is Inflation Dead?”  Are you kidding me?  The headline “Weaker Inflation Views Stir Fed Fears” appeared in the WSJ this week.  Spin that narrative, baby!  The bottom line is that the Fed would desperately like to steepen the Treasury curve and it can’t do that if higher inflation is seen as a problem.  Never mind that according to their preferred measures inflation has been stuck close to its goal of 2% for years.  We do give credit to Kansas City Fed President Esther George for countering the low inflation problem narrative, but we wonder how long it is before she is brought in line. 

One thing about tariffs, they should help the Fed with its current inflation focus.  It should be tickled to death. While Trump may have solved the Fed’s problem, he simultaneously backed it into an even tighter corner.  The Fed can’t cut rates if inflation is heading higher because of tariffs.  The real problem is that the cycle is showing strains that will only be resolved with a recession and a normal cleansing of weaker businesses and credits.  The Fed will fight this gravitational pull any way that it can to no avail. 

The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.