Tuesday Topic: Is Inflation Spike Transitory?

Thanks Barb for presenting this situation here.  As bankers we must sift through a lot of material to get to the essential elements of every situation.   

I like the perspective attributed to Benjamin Graham - in the short run the market is a voting machine, however, in the long run it is a weighing machine.  These macroeconomic situations always come with a lot of noise and confusion, so I like seeing the Bloomberg article with all of the metrics.   We are all making assessments along the way and positioning our portfolios with the best information at hand.  In the long run those decisions will be weighed against reality.  So, how much do you want to bet on the various scenarios.  

My crystal ball is no better than anyone else's.  However, I can safely predict that the Fed will over-use the "transitory" term, because it helps the narrative that they are determined to maintain in order to assure the markets that they are in a command and control stance with respect to interest rates and improving the economy.   So, I don't consider their declarations about inflation to be unbiased.  

Most importantly, we have to understand that the dynamics of inflation are like other economic events.  It will not be universally bad or good.  As realized, inflation will produce both threats and opportunities.  The direct benefits of inflation for borrowers and lenders are intuitive.  A widespread belief that inflation like that experienced several decades ago is on the horizon would actually be stimulating to lending.  In the long term however, higher interest rates that are typical consequences of inflation create a diverse set of impacts.  If the modern monetary theory advocates and the Fed's expressions of their sovereign dominion in the economy are correct then no compensating interest rate increases would be necessary.  In an economy that has a glut of deposits and a dearth of lending, widespread recognition of the real presence of sustainable inflation and a policy commitment to low interest rates may be exactly the formula to simultaneously punish depositors and incent spending and borrowing to a historic level of economic activity.

Combined with a government intent on spending and with a suspended posture on taxation, we are likely to test an aggressive combination of monetary and fiscal policy that has never been before been attempted on such as grand scale.  So, if we don't get something more than "transitory" inflation over the next couple years, aren't we poised to increase the monetary and fiscal pressure until we do?  What would lead us to a moderating posture?

------------------------------
Neil Stanley
------------------------------
-------------------------------------------
Original Message:
Sent: 06-14-2021 10:03
From: Barb Rehm
Subject: Tuesday Topic: Is Inflation Spike Transitory?

Inflation speculation is everywhere these days, after consumer prices jumped more than expected over the last two months. Fed officials insist they have everything under control, that this bout of inflation is "transitory," and once supply catches up with demand prices will recede. The FOMC meets this week, and The Wall Street Journal on Monday reported that higher inflation may force the Fed to raise interest rates sooner than expected.

What do you think? Do you think the Fed is taking inflation seriously enough? When do you expect rates to rise? If you're unsure, this Bloomberg article lays out the factors to consider and what they are indicating today.

------------------------------
Barb Rehm
Senior Managing Director
IntraFi Network
Arlington VA
------------------------------