They may go on a spree instead as the country reopens. But that does not mean they will continue to do so. The New York Fed said people have been using a third of their unspent holdings to pay off debt. The excess savings of US households has reached $US2.3 trillion. The elephant in the room is the bloated stock of money sitting in bank accounts. We will find out soon enough whether this matters. The Fed follows a New Keynesian lodestar and no longer pays attention to monetary data. The other “benign” argument is that yields on 10-year US Treasuries remain calm and have not “confirmed” inflation angst. Shelter costs typically lag property prices by 12 months. Yet one might ask what will happen when the 11 per cent rise in US home prices over the past year – greater than the subprime peak in 2006 – filters into the “shelter” component making up a third of the inflation index. The benign view is that inflation is distorted by “base effects” and by a handful of “reopening” items such as the 10 per cent jump in airline fares, or an equivalent surge in used car prices – linked in turn to the semiconductor crunch in the car industry.Ĭlarida says COVID-19 has “torn up the playbook” on the business cycle, turning the post-pandemic phase into a roller-coaster ride. This number was well above what I and outside forecasters expected.” Vice-chairman Richard Clarida, the high priest of policy, nevertheless confesses that the latest surge has caught the institution off guard. The Fed insists the inflation spike is “transitory”. People need to be cognisant of those risks.” “The thing that people don’t fully appreciate is that when they catch up, the level of short-term rates are going to climb much higher than currently priced by financial markets. “Once they start, they’re going to be late,” he told Bloomberg Surveillance. At some point markets will stop believing that the Fed is behaving like a credible central bank.”įormer New York Fed chief Bill Dudley says his old alma mater has fallen behind the curve, and the longer it delays, the more brutal it will be. “They’re ignoring all the warning signs, just as they did in the 1970s. There is going to be a big one-off jump in prices, and it could happen very fast if the Fed allows the liquidity to feed through. “The economy is at full capacity and the money stock has grown by a fifth at a time when everybody was locked down and unable to spend. Inflation could be headed for double digits by the end of the year,” says Lars Christensen, founder of Markets and Money Advisory, and author of a book on Milton Friedman. “What the Fed is doing is a pure drop of helicopter money. It is downplaying all evidence of pent-up inflation as “temporary”. It is persisting even though the broad M3 money supply has grown at 24 per cent over the past year.
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