First up, today Jay Powell put some more hair on his chest and bolstered his inflation-fighting manhood with the tough talk at the CATO Institute in Washington, D.C.
He said: “We need to keep at it until the job is done,” and added that “history cautions strongly against prematurely loosening policy.”
Actually, the most important Fed spokesperson, Wall Street Journal reporter Nick Timiraos, announced on this morning’s front page that the Fed will raise its target rate 75 basis-points, which will take it to 3 to 3.25% from its current 2.25 to 2.50%.
It’s quite true that some forward-looking inflation indicators such as falling M2 growth, slumping commodity prices, a very strong king dollar and add declining oil to that list, all suggest that the worst of the inflation may be over, but (and it’s a big but) as Art Laffer told us two nights ago, there’s an enormous volume of excess cash still sloshing around the banking system and the economy.
What’s more, all these federal subsidy programs (think student loans, food stamps, housing assistance, child allowances) have an inflationary impact. The income effect puts more demand-side money in their hands and the lack of work requirements generates disincentives to get back into the labor force and produce.
Hence, more demand coupled with less supply equals higher prices or inflation will remain sticky for quite some time as it has become embedded throughout the economy not only in prices, but also in wages.
For example, the inflation tracker from the Cleveland Fed anticipates that the year-over-year CPI for the next two months will remain around 8.2%. Remember the Fed’s target is 2%. Also, even if the Fed target rate gets to 4% or slightly higher by the end of the year, that will still be a negative rate which is almost always consistent with higher, not lower inflation.
Compounding our economic difficulties, the GDP tracker from the Atlanta Fed has just downshifted their Q3 estimate from 2.6% to 1.4%. That’s a bad sign. We seem mired in an inflationary slump. Two years ago, President Biden inherited a non-inflationary boom. Shows you how damaging big-government socialism can be.
This article is adapted from Larry Kudlow’s opening commentary on the September 8, 2022, edition of “Kudlow.”