January Data Get Hot. A hot inflation report for January might be a surprise to some investors, but it really shouldn’t be. Put all these reports together and we have an economic stew that signals that a “data sensitive” Federal Reserve isn’t done hiking rates.
Soft Landing? Our forecast for real GDP growth this year is -0.5%, with inflation remaining above 4%. In other words, a recession with higher inflation – stagflation. That’s what we expect…and it’s not a soft landing.
Not Goldilocks. Not long after Friday’s Employment Report multiple analysts and commentators were calling it a “goldilocks” report, by which they meant it showed that the economy was neither “too hot” nor “too cold,” but instead, “just right.”
The Aftermath Economy. We will forever believe that locking down the economy for COVID-19 was a massive mistake. In other words, the US enters the decades ahead with more debt, less spending power, an undereducated population, and less petroleum put aside for national defense. The US has made the future riskier.
Drop in Budget Deficit is a “Sugar High”. Look for bigger budget deficits in the next few years as the revenue “sugar high” wears off.
Reports: Solid Growth, Persistent Inflation... we think inflation will eventually slow down. But that doesn’t mean it’s going to slow down as fast as the Fed thinks.
Will Higher Interest Rates Tame Inflation? Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation. And this is where the problem lies.
Economic Data...One thing we must remember when looking at economic data is that everything is distorted.
Silly Season-Interpreting Economic Reports. The bottom line is that, for now, the economy continues to grow and inflation remains a very serious problem.
Monetary Muddle...The Fed has never managed policy under its new abundant reserve system with inflation rising this fast. No one, even the Fed, knows exactly how rate hikes will affect the economy under this new system.