'..These are highly speculative markets, and the more speculative they become, the more difficult it will be for the Fed to tighten conditions. I today equate such loose conditions with ongoing strong Credit growth and persistent inflation.
..inflationary forces have been unleashed. There are now powerful inflationary dynamics lurking throughout the system – at home and globally. Companies have grown comfortable raising prices. Labor has gained confidence to demand more compensation. Global commodities supplies are tight.
..If the Fed and global central bankers relax with inflation in the five to six percent range, it will likely spike back toward double-digits during the next inflationary shock. This is no time for Inflation Complacency.''
January 19 – Bloomberg (Philip Aldrick): “Going soft on inflation will plunge economies back into the recessionary depths of the 1970s and have ‘adverse effect on working people everywhere,’ former US Treasury Secretary Larry Summers warned. The remark is a response to suggestions from economists including Olivier Blanchard, a former International Monetary Fund chief economist, who have suggested lifting inflation targets from 2% to 3% to avoid recessions. ‘To suppose that some kind of relenting on an inflation target will be a salvation would be a costly error, it would ultimately have adverse effect as it did in a spectacular way during the 1970s,’ Summers… told a panel at the World Economic Forum’s annual meeting…”“Going soft on inflation” actually gained momentum with the Bank of England’s late-September emergency operations. I understand why the BOE believed they had to restart QE to thwart bond market meltdown. And I further appreciate that they made the program temporary, in hopes of guarding against moral hazard. But the whole world was watching – and they saw exactly what they were hoping to see. Following the bond scare and urgent BOE response, markets were assured that central bankers might talk tough on inflation, but they would not risk tightening to the point of sparking crisis.
Financial conditions almost immediately began to loosen globally, a loosening that has gathered important momentum early in 2023. Loose conditions created a lot of dry tinder for a powerful cross-asset short squeeze that has only engendered looser conditions.
It was important that central bankers pushed back against the view that QE liquidity backstops would be restarted as necessary to quash incipient market instability. Powell was hawkish during his November 1st post-meeting press conference. But Fed hawkish resolve soon dissipated. Now, messaging has become so frayed that markets don’t take hawkish resolve seriously. The paramount message that the Fed would push back against looser market conditions is MIA.
..
And when contemplating Treasury market pricing for an accident, China is a major 2023 risk. Systemic risk is rising exponentially in China. Credit continues to expand swiftly, while the quality of loans and finance deteriorates. Massive stimulus raises the odds of currency instability. Something is going to break.
..These are highly speculative markets, and the more speculative they become, the more difficult it will be for the Fed to tighten conditions. I today equate such loose conditions with ongoing strong Credit growth and persistent inflation.
..inflationary forces have been unleashed. There are now powerful inflationary dynamics lurking throughout the system – at home and globally. Companies have grown comfortable raising prices. Labor has gained confidence to demand more compensation. Global commodities supplies are tight.
And, importantly, policymakers must anticipate ongoing supply shocks. Global fragmentation will gain further momentum, with negative ramifications for pricing pressures. We should assume climate change will create significant risks to foods supplies globally, while boosting myriad inflationary risks. And there has to be planning for inflationary consequences related to geopolitical developments. An increasingly hostile world increases the likelihood of supply disruptions, certainly including energy markets. If the Fed and global central bankers relax with inflation in the five to six percent range, it will likely spike back toward double-digits during the next inflationary shock. This is no time for Inflation Complacency.'
- Doug Noland,
Inflation Complacency, January 20, 2023
Context(Global Stagflation) - 'This situation has essentially morphed into a cost-of-living crisis..' - Dr. Hunt(The Taylor rule) - '..Bullard .. Using standards set by Stanford economics professor John Taylor..'(Global Stagflation) - '..Powell’s statement is totally inconsistent with Paul Volcker’s final say on monetary economics..'(Global Stagflation) - '..the failure of Bernanke-style central bank inflationism.' - '..In Austrian Economics parlance, it’s been epic malinvestment.'