Alan's Alert 7-15-2021

 

Yesterday, Fed Chairman Jerome Powell sat (on zoom) before the US House Committee on Financial Services.  He was peppered with questions ranging from crypto (especially the rumored Fed-coin) to rolling back MBS purchases.  It was a marathon, but he held strong to his prepared remarks and deflected any questions that would show the Fed’s hand.  He is an expert at running out the clock on difficult questions.  There were a couple Congressmen that had very direct questions to Powell concerning inflation and what he means exactly when he says, “still a ways away” from reaching the Fed’s goals.  He was able to reiterate that the Fed won’t be removing their “accommodative” policy and would give plenty of advance warning when they would.  Mr. Powell sits in front of the Senate’s Financial Services committee today.  I expect it to be a re-run of yesterday. 

 

Unemployment stats were released this morning and initial claims continued its slow downward trend.  We are down 26k claims from last week.  This slow pace will keep the Fed in “accommodative” mode.  After yesterday’s hearing, it is strongly believed, by most of congress and the Fed, that the goal is an unemployment rate at 3.5%.  I think this is extremely foolish.

 

Here’s the full picture of the change in the unemployment rate since January of 1948:

The unemployment rate bottomed out at 4.4% at the lowest in the last cycle (March 2007) and 3.8% on the cycle before that (April 2000).  Then the rate didn’t break below 5.0% in the preceding two cycles.  To think that we’ll see an unemployment rate at or below 3.5% is ambitious at best and negligent of history at worst.  I’m of the mind that unemployment is still elevated but juicing the money supply isn’t the way to get it down.  This fact was brought up during yesterday’s hearing but nothing came of this insight.  There was no follow-up to ask who really benefits from the accommodative monetary policy if it doesn’t improve unemployment.  Our big fireworks moment was again, shelved for a different day. 

 

Looking in at the continued claims section of the unemployment report, you can see that people are still moving off the pandemic related unemployment assistance.  We have almost 10.4 million people using the assistance but every week, more are moving off.  I put together the below graph to illustrate the point:

 

The amount of people moving off the assistance is down from last week but the trend is higher.  At some point this trend will stall as all the states ending the emergency relief early will be exhausted and the rest of the states will hold out until September.

 

 

As I reflect on yesterday’s hearing, I am shocked at how flippant the Fed and Congress are at the sheer volume of money that they talk about.  Their talk is full of rosy outlooks with no worries in sight.  They have no idea of the tidal wave of inflation that could be staring them directly in the face.  Maybe some of them feel differently behind closed doors but they do a good job masking it.  As inflation is allowed to run hotter, higher interest rates will be needed to stem the tide.  If we are at 5% annual inflation, we’ll need the Fed funds rate at 6-7% to stop it.  If inflation runs at 8%, 10% or greater would be needed.  Currently, with the Fed funds rate at 0.0% to 0.25%, the Fed is a long way from even thinking there is problem.  It simply reinforces my view that we are still very early in this trend.

 

A friend and fellow subscriber mentioned to me that PBS Frontline put a documentary together called “The Power of the Fed”.  It aired on Tuesday and it’s certainly worth a watch.  The people that put the production together get some big players to sit down for interviews and ask them great questions.  It highlights the period from the 2008 crash through current day.  Its comical that some of these players (particularly Sheila Bair and Peter Fisher), have a completely different views of the Fed’s actions after they leave their cushy government posts.  A few have truly drunk the Kool-Aid.  Neel Kashkari is especially cringe-worthy.  He is a mirrored reflection of Arthur Burns and struggles to understand that the Fed’s monetary policy is reckless and exacerbates the income inequality we see today.  Neel is of the mind that printing vast sums of money is great for low-income individuals.  He is a dangerous individual because he has been given way more power than he should have and he wields it in a way that, he believes, benefits all people.  It reminds me of a C.S. Lewis quote: