Did the Fed Just Unwittingly Light the Spark Towards 13% Inflation?

fed spark

From Birch Gold Group

The Fed just announced a major shift in its approach to inflation, and the move is not getting nearly the attention that it deserves. That is, of course, unless you don’t mind inflation moving higher than any other time in recent memory.

Writing for ThinkAdvisor, Tim Duy, senior director of the Oregon Economic Forum at the University of Oregon, explains the potential for the upcoming shift:

Having learned a hard lesson in the last recovery — don’t tighten monetary policy too early — the central bank is leaning in the opposite direction. In practice, that means the Fed will not just emphasize actual inflation over forecasted inflation, but will also attempt to push the inflation rate above its 2% target. It’s a whole new ballgame.

The Fed has already come close to “overheating” the economy in the past, and just last year, started to let inflation “run hot.”

Thanks to the pandemic, the “official” rate of inflation has cooled off a bit this year. But now, it appears the Fed’s own Governor Lael Brainard sees inflation as unbalanced, with the only solution being to offset that imbalance and focus.

Here’s how the Fed is setting the stage for rising inflation again…

Brainard made this fairly clear in recent commentary captured on Robert Wenzel’s Economic Policy Journal:

Brainard pointed out that “research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.”

Wenzel provided an analogy to illustrate the situation, writing: “This type of goose-inflation policy action is the equivalent of the early 20th-century medical practice of prescribing smoking to treat asthma.”

You can see the official CPI inflation for the U.S. illustrated below, before much (if any) change in Fed policy has taken place:

cpi inflation

Between this May and June, inflation has already started to rise, with the potential for much more of an increase if the Fed lets it “run hot” again.

Along with the near-certainty for loosening monetary policy, the Fed could be devoting more of its focus to the unemployment situation in the U.S.:

Brainard said the Fed should focus on achieving “employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.” The Fed is going to try to run the economy hot to push down unemployment.

“I don’t see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshoot a bit,” said Federal Reserve Bank President Patrick Harker to the Wall Street Journal.

In summary, the Fed seems to be suggesting it will counterbalance “lower” inflation by overshooting its 2% inflation target. Just how far the Fed overshoots is anybody’s guess.

One thing is likely… the Fed isn’t going to be reporting the “real inflation” that hits the consumer in the pocketbook (about 4% currently) while it plays around “balancing” the numbers.

Wenzel leaves us with this dire outlook: “Three-percent inflation is very likely, possibly 5%, but I can’t rule out 10% or 13% if the Fed really screws things up given their fatuous thinking about inflation and their overconfidence on how easy it will be to get price inflation under control once it starts to climb at a serious pace.”

Let’s hope that the inflation “horse” can be put back into the barn, before 1980s-style hyperinflation starts becoming a reality.

Hedge Your Bets Against Rising Inflation

Strange times like these require you to examine your situation. Especially if inflation starts to climb at a serious rate.

Consider hedging your bets against inflation, including the possibility of diversifying your savings with precious metals like gold and silver.

Inflation might start going on the rise, but your buying power doesn’t have to shrink.

2020, Featured, federal reserve, inflation, monetary policy, the fed, us economy