The Numbers Don't Lie; The Fed Won't Win This Inflation Fight
The central bankers at the Federal Reserve continue to talk tough about fighting inflation.
But is it a fight they can win?
The numbers say no.
After the CPI data cooled a bit in July, many observers expected the Fed to declare victory and begin pivoting away from tightening monetary policy. Instead, the central bankers doubled down on the tough talk. Minneapolis Federal Reserve Bank President Neel Kashkari said the Fed remains “far, far away from declaring victory” on inflation. He went on to say he hasn’t seen anything that changes the trajectory of the Fed’s inflation fight. Kaskari remained adamant that the central bank needs raise rates to 3.9% by the end of the year and to 4.4% by the end of 2023. He even insisted he won’t be deterred by a recession.
The markets seem to have faith in the Fed’s ability to bring inflation down to 2% and keep it there for most of the next 30 years. Peter Schiff said they are “living in fantasy land.”
Peter is right.
For all the tough talk about stopping inflation, the Fed’s plan isn’t enough.
Pushing rates to 3 or 4 percent won’t tame 8.5% CPI.
If you look at all of the Fed tightening cycles since 1973, the central bank has never stopped tightening before the Fed funds rate was higher than the CPI.
It’s clear from the chart that the Fed has a lot of tightening to do before it brings the real rate positive. It’s also clear that 3 or 4 percent isn’t going to get the job done.
Analyzing interest rates based on the Taylor Rule leads us to the same conclusion.
Economist John Taylor came up with a formula that links the Federal Reserve’s benchmark interest rate to levels of inflation and economic growth. Based on the Taylor Rule, the Fed fund rate needs to be 9.69% assuming 2% real neutral rates.
Given the history and the model, it is difficult to fathom how exactly the Federal Reserve is going to tame inflation over the long term.
Keep in mind that the CPI is actually higher than the government numbers suggest. If we use the CPI formula from the 1970s, rates would need to be over 17% in order to slay inflation.
And while the 3 or 4 percent interest rate won’t stop the inflation freight train, it will pop the bubble economy that was built on easy money and debt. In fact, we’re already in a recession despite mainstream pleading to the contrary. This is why Peter Schiff says we are about to experience the worst of both worlds – high inflation and a recession.
Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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