This Week in Summary 12/16/2022

Dec 15, 2022 | Bubble Monitor, No Bull Economics

Bubble Monitor Chart
Bubble Monitor Chart

Fed Chair Powell’s comments during his recent Q&A (after raising the Fed Funds target range rate by +50 bps to 4.25% to 4.5%) were quite sobering to anyone willing to listen. During his speech, he repeatedly reiterated his determination to lower the PCE inflation rate to 2% from its current level of 6% come hell or high water.

Powell is Right, Inflation is a Pernicious Evil 
“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her saving in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5% inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120% income tax, but doesn’t seem to notice that 5% inflation is the economic equivalent.”- Warren Buffett

While this rate hike slowed to +50 bps from the previous +75 bps level, Powell emphasized that we should expect a sustained time of restrictive monetary policy once the Fed reaches its Fed Funds target of 5.1% at the end of 2023, suggesting that it will only decline to 4.1% at the end of 2024 and 3.1% at the end of 2025. This is what he believes it will take to lower the Fed’s forecast for PCE inflation to 5.6% at the end of 2022, 3.1% in 2023, 2.5% in 2024, and finally to the 2.1% target in 2025.

However, as this chart reveals, the Fed in days past was willing to simply settle for a Fed Funds rate that was higher than the PCE (something that could be accomplished very soon). Even this sensible rule was violated after the 2008 Great Recession when the Fed Funds rate was held at zero for many years, including after Powell’s appointment to the board in 2012. 

Fed funds rate and personal consumption graph
Fed Funds Rate and Personal Consumption Graph

No matter, we are currently looking at 3 years of pain (possibly severe) to fix a covid lockdown that the Fed should have resisted to begin with. Further, Powell made it clear that his sympathies are not with the unemployed so much because the economic hurt from inflation is much worse. Maybe, but maybe it is also true that his power to make this decision is too much to wield for an unelected mortal.       

Restaurant Research

Email Sign-up

15 Second Posts

What is Fixed-Income Issuance Dominated by?

Total U.S. fixed income (FI) issuance declined -34% y/y to $8.8 trillion during 2022 as interest rates ramped up.

Bank Deposits Growing Much Faster than Business Loan Demand

Banks have been parking excess deposits in various forms of government debt that are subject to interest rate risk & in risky crypto bets. This is causing systematic risk.

Nerdwallet Survey Shows an Indebted & Very Stressed Consumer

Consumers are combating the higher price of living & higher interest rates by driving less, buying store brands & taking on more debt.

The United States of America is Worth Saving

Americans need to be reminded about our heritage as the single most productive nation as measured by GDP/person with a unique capability to bless the entire world if we can simply get back to business.

Should Private Banks Go Extinct?

Since the 2008 Great Recession, 134 banks with assets of $1.25 Trillion have been closed by regulators. At the same time, the Fed’s ballooning balance sheet now amounts to nearly 50% of total domestic bank deposits.

What Happened to Silicon Valley Bank?

Don’t assume that SVB’s difficulties are symbolic of the entire banking industry.

What Does the End of the Petrodollar Mean?

The Saudi minister of finance announced that the Kingdom was ending the petrodollar. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal”. Yikes!

Senator Kennedy Schools Country on Economics 101

We have a choice of how to tame inflation, cut government spending, or throw people out of work.

Inflation is Marginalizing Purchasing Power from the Lower-Income Demo

As households with annual incomes >$70k drive 62% of total food-away-from-home sales, it is more important than ever to focus on this demo especially as spending from the lower-income demo slows.

A Look at Consumer Expenditures by Category

You can learn a lot about someone by how they spend their money…

Digital Marketing Opportunities
Restaurant Research

A Restaurant Research LLC Company