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The Daily Missive

Fed-Watching 101

By November 2, 2022February 8th, 2023No Comments

“There is an unreasonable joy to be had from the observation of small birds going about their bright, oblivious business.”

– Grant Hutchison

Jay Powell can’t catch a break.

According to the Bureau of Labor Statistics, job openings surged to nearly 11 million in September, despite Fed efforts to cool the labor market.

“By all the key metrics in this report, the labor market is resilient,” said Nick Bunker, head of economic research at the Indeed Hiring Lab. “Job openings still vastly outnumber unemployed workers, the quits rate remains elevated and layoffs are still well below pre-Pandemic levels.”

You’ll recall we’re watching the employment numbers because the current administration points to strong job numbers as the main reason we’re not in a recession.

“The economy is strong as hell!” President Biden commented through a mouthful of ice cream on October 26.

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Investors watching the Fed like Biden gawks at ice cream. (Source: Boston Globe)

Brady Leonard of the No Gimmicks Podcast accuses the president of gaslighting, well, the whole world on the issue. Leonard:

The country’s gross domestic product decreased during the first two quarters of 2022, meeting the definition of a recession accepted by economists and politicians on both sides of the aisle for the last several decades.

Former President Clinton confirmed what was already accepted in 2000, when he said “a recession is two quarters in a row of negative growth.” Joe Biden’s strategy to handle the recession, so far, has been to deny its existence wholesale. The president insisted “I don’t think we’re going to see a recession,” despite the accepted definition of a recession having already been met.

Some in corporate media dutifully, and shamelessly, parroted the administration’s new definition of the word, and Wikipedia was forced to freeze edits on their ‘recession’ page, after partisans rushed to edit away the long-acknowledged definition.

Hence Jay Powell’s fourth consecutive 75 basis point interest rate hike today.

We are quite familiar with the Fed’s “growth-recession” Catch-22. Their efforts to quell consumer demand and crush the employment market by raising rates is having no effect on inflation. More rate hikes to come… maybe.

“The Fed may slow soon,” reads Bloomberg this morning. “But they don’t want easy financial conditions.”

A majority of economists in the October 17-24 poll forecast another 50 basis point hike in December, taking the funds rate to 4.25%-4.50% by close of 2022. That matches the Fed’s “dot plot” median projection.

But with the surging job openings, a Fed Pivot is looking less likely anytime soon. Trouble is, the Fed started out behind the eight-ball in tackling inflation… and may be powerless to do anything about it.

Jim Rickards made the argument here on the Wiggin Sessions inflation comes in two forms:

Supply-side Inflation… energy shortages because of Biden Energy Policy, empty shelves, supply chain breakdowns, bottlenecks at the Port of Los Angeles, not enough truck drivers, higher fuel prices get passed along. That’s the kind of stuff that’s going on from the supply side.

Demand-side inflation– what’s called demand-pull inflation– is mostly psychological. In other words, consumers get it in their heads that prices are going up. Maybe they are. So what they do is pull demand forward.

“I lived through this in the 70s,” Rickards says to illustrate. “You want to buy a refrigerator or car or a new suit or clothes, or anything. You say to yourself ‘You know what? I better go buy it now, right now, because if I wait three months or six months, it’s going to be a lot more expensive.’” He continues:

So what you’re doing is pulling all that demand forward. And it feeds on itself. Prices are going up because there’s more demand possibly combined with supply shocks. And then when the prices go up it validates the narratives, like, “Oh, see, I told you. Prices went up. Better, go buy more.” And it just feeds on itself.

The Fed can do something about the demand side, which is why they’re trying to destroy demand.

“In the 70s,” Rickards says “the demand-side inflation also started on the supply side with the Oil Embargo in 1973. Then there was a second embargo in 1979 from the Iranians. Those supply shocks tipped over into the demand side, and then it just has a life of its own.

“We’re not at that point yet. We’re getting dangerously close. We definitely have inflation from the supply side. It hasn’t yet affected the consumer side of it.”

Which explains why consistent higher-than-average rate hikes haven’t touched consumer demand, the job market… or inflation.

P.S. “Y’all forgot to mention,” writes reader JenPaul, C connecting the thin supply of diesel to the supply side inflation conundrum. “Train engines use diesel fuel going ‘to and from’ all those container ship yards.

“Train engines for freight (products within boxes on pallets in boxcars) use diesel fuel traveling throughout our 48 States.

“Refrigerator boxcars use diesel fuel to maintain constant ‘cool’ temperature required for fruits, vegetables and meats during freight train transportation. Container ships use a mixture of diesel fuels traveling from overseas countries to USA sea ports.

“When all those freight train engines stop moving…then…y’all have an extreme national supply chain problem causing zero stocked shelves at stores having an outcome of angry American consumers.”

There’s nothing another 75 point rate hike can do about the diesel supply. But, far be it for us to fustigate, “The economy is strong as hell!”

Addison Wiggin

Addison Wiggin Addison Wiggin is an American writer, publisher, and filmmaker. He was the founder of Agora Financial and publisher for 18 years. An acclaimed New York Times best-selling author, his books include: Financial Reckoning DayEmpire of DebtThe Demise of the Dollar, and The Little Book of the Shrinking Dollar. Addison is also the writer and executive producer of the documentary I.O.U.S.A., an exposé on the national debt, shortlisted for an Academy Award in 2008. He lives in Baltimore, Maryland with his family. Addison started his latest project, The Wiggin Sessions, powered by The Essential Investor, in March 2020. He films from a homegrown studio in his basement.