The biblical prophets chastised the people for having eyes but not seeing and for having ears but not hearing. When it comes to inflation, the Federal Reserve might be chastised in the same way. Despite the many anecdotes suggesting that inflation is on the rise, the Fed does not seem to listen. Similarly, despite the many clues in plain sight now pointing to a marked acceleration in inflation later this year, the Fed seems to be turning a blind eye.
The Fed is certainly not listening to Warren Buffet. At a recent Berkshire Hathaway meeting, Buffet warned his investors that his company was seeing a red-hot economy and substantial inflationary pressure. While noting that everybody now seemed to be raising prices, he drew particular attention to the rapid price increases for steel, lumber and other building materials.
Buffet also might have noted that the automobile and appliance companies are now experiencing significant supply chain problems especially in regard to computer chips and that companies across the board are finding it difficult to hire skilled workers.
It seems that the Fed is also not listening to the markets, which have now significantly raised their inflation expectations. Indeed, according to the Saint Louis Federal Reserve, the 10-year breakeven inflation rate has now risen to more than 2.4 percent. This is its highest level in the past decade, and it is also significantly above the Fed’s inflation target. So much for the Fed’s belief that inflation expectations are still well anchored.
Closer to home, the Fed is paying little regard to the domestic money supply explosion to which its ultra-easy monetary policy has given rise. As a result of the Fed’s aggressive bond-buying program, the broad money supply is now growing by around 30 percent or by far its most rapid rate in the past 60 years. If Milton Friedman was right in his assertion that inflation is always and everywhere a monetary phenomenon, the currently very rapid rate of money supply growth should be raising red inflationary flags at the Fed.
More important yet, the Fed seems to be ignoring the extremely expansionary nature of President BidenJoe BidenGarland to emphasize national security, civil rights in first congressional appearance as attorney general Afghan president: ‘Critically important’ for US, NATO to fulfill security funding commitments Schumer ‘exploring’ passing immigration unilaterally if talks unravel MORE’s budget policy. At a time that the Congressional Budget Office is estimating that the U.S. economy is currently operating at only 3 percent below its full employment potential, Biden’s COVID-19 rescue plan would imply that this year the U.S. economy will receive budget stimulus amounting to as much as 13 percent of GDP.
Adding to the risk that such a large amount of fiscal stimulus could soon lead to substantial economic overheating is the fact that it is occurring as the Federal Reserve has its pedal to the metal. Not…
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