Wharton professor Jeremy Siegel says Jerome Powell is making one of the biggest policy mistakes in the Fed’s 110-year history, and it could lead to a major recession

Link: https://finance.yahoo.com/news/wharton-professor-jeremy-siegel-says-191800487.html

Excerpt:

The Wharton professor Jeremy Siegel has a big issue with the Federal Reserve’s aggressive interest-rate hikes in its bid to tame inflation, and he’s worried that the central bank is making the biggest mistake in its history and may provoke a steep recession.

Siegel said inflation is starting to come down significantly, but the Fed is still moving forward with its rate hikes.

He said it could be “one of the biggest policy mistakes in the 110-year history of the Fed, by staying so easy when everything was booming.”

…..

“I think the Fed is just way too tight. They’re making exactly the same mistake on the other side that they made a year ago,” Siegel added.

To Siegel’s point, the Fed has had a lousy record of accurately forecasting where it expects interest rates to be just a few months into the future.

….

“I am very upset. It’s like a pendulum. They were way too easy through 2020 and 2021, and now ‘we’re going to be real tough guys until we crush the economy,'” Siegel said of the Fed.

Siegel expects the Fed to “eventually see the light” as none of their recent predictions are likely to come true.

“I think they’re going to be forced to lower the rates much more rapidly than they think,” Siegel said, a move that could set up stocks for a potential recovery from their ongoing decline.

Author(s): Matthew Fox

Publication Date: 25 Sept 2022

Publication Site: Yahoo Finance

Dot Plot Show Fed Anticipates More Hikes in 2023 to 4.50 Percent

Link: https://mishtalk.com/economics/dot-plot-show-fed-anticipates-more-hikes-in-2023-to-4-50-percent

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Hikes Come Hell or High Water? 

  • The Fed participants have a median expectation of 4.25 to 4.50 percent for the end of 2022
  • That’s another 1.25 percentage points more this year.
  • The Fed then anticipates one more hike in 2023 to 4.50 to 4.75 percent.

I have to admit that a year ago I did not foresee this. But here we are. 

The key question is not where we’ve been but where we are headed. I Highly doubt the Fed hikes another 1.25 percentage points this year or gets anywhere close to 4.50 to 4.75 percent in 2023.

Author(s): Mike Shedlock

Publication Date: 21 Sept 2022

Publication Site: Mish Talk

The biggest Fed rate hike in 40 years? It could be coming next week.

Link: https://www.marketwatch.com/story/the-biggest-fed-rate-hike-in-40-years-it-might-be-coming-11663097227

Excerpt:

After another dismal U.S. inflation report, economists at the brokerage Nomura Securities on Tuesday became the first on Wall Street DJIA, 0.12% to predict a full-percentage-point increase in the Fed’s benchmark short-term rate.

“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” the economists at Nomura wrote in a report to clients.

The last time the Fed made such a drastic move was in the early 1980s — another period marked by sky-high inflation.

At each of the last two meetings, the monetary-policy-setting Federal Open Market Committee raised the targeted rate by 0.75 point.

Author(s): Jeffry Bartash

Publication Date: 13 Sept 2022

Publication Site: MarketWatch

Social Security COLA for 2023 Estimated at 8.7%

Link: https://www.thinkadvisor.com/2022/09/13/social-security-cola-for-2023-estimated-at-8-7/

Excerpt:

The consumer price index data for August, released Tuesday, shows 8.3% inflation over the past 12 months before a seasonal adjustment and was 0.1% from July to August on a seasonally adjusted basis. In July, prices rose by 8.5% over 12 months and were unchanged from June.

Based on the new data through August, The Senior Citizens League estimates the Social Security cost-of-living adjustment, or COLA, for 2023 could be 8.7%, lower than the 9.6% it predicted last month.

An 8.7% COLA would be the biggest increase since 1981. The adjustment would increase the average retiree benefit of $1,656 by $144.10, according to the league.

Author(s): Dinah Wisenberg Brin

Publication Date: 13 Sept 2022

Publication Site: Think Advisor

Fed Rate Hike Odds Jump to Full Point After the Hot CPI Report

Link: https://mishtalk.com/economics/fed-rate-hike-odds-jump-to-full-point-after-the-hot-cpi-report

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Yesterday, the market penciled in a three-quarter point hike. Today, the market expectation is for a full point hike.

The WSJ notes that would be the largest hike since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.

Author(s): Mike Shedlock

Publication Date: 13 July 2022

Publication Site: Mish Talk

Inflation Hits 9.1 Percent, Highest Level in 41 Years

Link: https://reason.com/2022/07/13/inflation-hits-9-1-percent-highest-level-in-41-years/?utm_medium=email

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Prices were 9.1 percent higher in June than a year before, exceeding expectations and surging to a 41-year high.

Department of Labor data released Wednesday morning showed that inflation picked up speed in June, rather than slowing. Prices rose by 1.3 percent during the month, up from a 1 percent increase in May. A sharp rise in energy prices, and gasoline prices particularly, helped power the annualized inflation rate to its highest levels in more than four decades. Food prices rose by 1 percent during June, and are up 10.4 percent over the past year.

Author(s): Eric Boehm

Publication Date: 13 July 2022

Publication Site: Reason

The Asininity of Inflation Expectations, Once Again By Powell and the Fed

Link: https://mishtalk.com/economics/the-asininity-of-inflation-expectations-once-again-by-powell-and-the-fed

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Common sense and practical examples suggest that inflation expectations theory is ass backward.

So much of the CPI is nondiscretionary that it’s difficult to impossible for CPI expectations to matter. 

Yet, economists focus on expectations that don’t matter and ignore the expectations that do matter, namely asset prices!

I have written about this several times previously, two of them before I even found the Fed study supporting my view. 

…..

A BIS study concluded “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.

Indeed, that must be the case as more goods for less money by default improves standards of living.

The Fed was hell bent on reducing standards of living via inflation. Now they struggle to undo the inflation and asset bubble consequences they created. 

The Fed is the problem, not the solution.

Author(s): Mike Shedlock

Publication Date: 25 Jun 2022

Publication Site: Mish Talk

Inflation: Return of a Plague

Link: https://www.city-journal.org/inflation-return-of-a-plague

Excerpt:

Experience has once again verified Friedman’s and Lucas’s theories, reducing to nothing the naïve propositions of Modern Monetary Theory, a recent delusion of the American Left. According to this unscientific, ahistorical theory, legislatures can control the production of money and distribute it in a way that satisfies all needs, with no destructive consequences from expanding the money supply. The question of reimbursing a gigantic public debt is not supposed to arise, because no one can force the government to pay what it owes. But this magical solution, adopted in part by Joe Biden, ignores the fact that public debt produces inflation and that a debt that is not repaid, as in the case of Argentina, eventually ruins the currency. All this was well known, at least by economists, so it is surprising that governments in America and Europe had not taken it into account of late. They have short memories. From the 1980s until recently, inflation had been constrained thanks to public policies inspired by Friedman—but policymakers had forgotten its threatening presence, as if it belonged only to the past. We can liken inflation with pathogens: smallpox has disappeared, but vaccination is what made it disappear; stop vaccinating, and the evil can return. In the 1980s, central banks helmed by Friedman’s disciples, such as Paul Volcker in the United States or Jean-Claude Trichet in Europe, raised interest rates and defeated inflation by reducing the money supply. Today, economic policymakers will need to apply the same remedy as in 1980. Central banks are working on this, but their conversion comes late; they have waited for inflation to establish itself before responding, a delay that will make the remedy more painful.

Author(s): Guy Sorman

Publication Date: 14 Jun 2022

Publication Site: City Journal

Individual Income Tax Payments on Pace to Reach Record Level

Link: https://www.wsj.com/articles/individual-income-tax-payments-on-pace-to-reach-record-level-11654421400

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An unprecedented gush of income-tax revenue is flowing into the federal government, driven in part by investors and business owners, and the size and speed of the increase has surprised even the nation’s fiscal-policy experts.

Individual income tax collections are poised to reach $2.6 trillion, or 10.6% of the economy in the fiscal year that ends Sept. 30, according to the Congressional Budget Office. That is up from 9.1% in 2021 and would mark a record in the 109-year history of the tax, topping the war-tax receipts of 1944 and the dot-com boom of 2000.

The surge has been particularly notable in taxes outside paycheck withholding, a signal that capital gains and business income are driving the trend. The Penn Wharton Budget Model estimates collections of non-withheld taxes reached an inflation-adjusted $522 billion in April 2022, compared with just over $300 billion in 2018 and 2019, before the pandemic.

Author(s): Richard Rubin, Amara Omeokwe

Publication Date: 5 June 2022

Publication Site: WSJ

Visualizing the Three Different Types of Inflation

Link: https://advisor.visualcapitalist.com/three-different-types-of-inflation/

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Monetary inflation occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds.

The U.S. central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply in order to boost the economy or tame inflation and keep prices stable.

Between 2020-2021, the money supply increased roughly 25%—a historic record—in response to the COVID-19 crisis. Since then, the Federal Reserve began tapering its bond purchases as the economy showed signs of strength.

Author(s): Dorothy Neufeld

Publication Date: 16 Jun 2022

Publication Site: Visual Capitalist

By Design, the Fed May Be Tightening Too Much

Link: https://www.wsj.com/amp/articles/by-design-the-fed-may-be-tightening-too-much-11655370001

Excerpt:

The Fed has often moved interest rates by 0.75 percentage point or more in recent decades. But until this week, it had always done so in a downward direction. Indeed, it was a hallmark of Fed policy that it always cut interest rates faster, with less prompting, than it raised them.

…..

This asymmetry reflected the Fed’s perception of risks. If it cut rates too little, the economy might spiral down and the financial system implode. If it cut them too much, inflation might, some years later, rise. Throughout this prepandemic period, inflation was low and, at times, too low, but that wasn’t a big deal. Moreover, during that low-inflation, low-interest-rate era, rates couldn’t fall very much — the Fed called this the “zero lower bound” — so best to act quickly to forestall a downward spiral. If inflation was a problem, there was no limit to how high rates could go.

This philosophy got taken too far. The Fed kept rates too low for too long last year (and the Biden administration enacted too much fiscal stimulus) out of a mistaken belief that inflation was a remote threat compared with prolonged high unemployment.

The result is that risks are now asymmetric in the other direction. Inflation is too high and a self-sustaining wage-price spiral is a real threat. Asked why, after carefully laying the groundwork for a half-point increase, the Fed raised rates by 0.75 point Wednesday, Mr. Powell pointed to an “eye-catching” report that showed long-term inflation expectations rising ominously.

Author(s): Greg Ip

Publication Date: 16 Jun 2022

Publication Site: WSJ

To Fight Inflation, The Fed Declares War On Workers

Link: https://www.levernews.com/the-fed-declares-war-on-workers/

Excerpt:

New inflation data released Friday offered dismal news: Historic price increases aren’t showing any signs of abating, and in fact may be accelerating.

What can be done? Federal Reserve Chairman Jerome Powell has an idea: throw cold water on the hot labor market — perhaps the one bright spot in the current economy.

In fact, Powell recently screamed the quiet part out loud, making clear the largest central bank in the world is in fact an adversary to workers, when he declared that his goal is to “get wages down.”

At a May 4 press conference in which he announced a .5 percent interest rate hike, the largest since the year 2000, Powell said he thought higher interest rates would limit business’ hiring demand and lead to suppressed wages. As he put it, by reducing hiring demand, “that would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.”

Author(s): Julia Rock

Publication Date: 13 Jun 2022

Publication Site: The Lever