COVID Shock & The Fed

We created the chart below to depict an “underdamped oscillatory system.” Hat tip, Dr. Thomas Synnott III.

Ppersonal Consumption Expenditures (PCE) vs. U-3 Unemployment Chart

We’ve included a half-century of Phillips curve data for personal consumption expenditures (PCE) vs. U-3 unemployment, color-coded by the person who was the Federal Reserve chair at the time. That way you can see a year-by-year history for all Fed chairs since William McChesney Martin. We’re using the PCE to describe inflation since it is the Fed’s preferred inflation measure. We’re using the traditional unemployment rate (U-3) since the Fed refers to it in their forecasts.

The horizontal orange line that links year 2019 (19) to year 2020 (20) depicts the effect of the COVID shock of last year when U-3 unemployment more than doubled from under 4% to greater than 8%. As you can see, there has been nothing in modern history like this sudden surge. The violence of the shock is greater and more abrupt than in any of the crises in the entire time period depicted.

Our point is to support what we are hearing from Fed Chair Jay Powell.  This is on his watch and the challenge for the Fed is monumental.

There are all sorts of warnings and forecasts of inflation spikes coming from the collective punditry. They may ultimately be correct, but is an immediate inflation spike on the horizon? We don’t think so. A temporary rebound is not an inflation shock that triggers a permanent trajectory shift in the price level. So for now, we view this economic recovery as coming from a “hundred-year-flood” type of shock.

Note that the shock you see depicted does not include the imminent substantial demographic shift of nearly a million dead Americans in excess of “normal” numbers. Nor does it show the global shock from “excess” deaths in nearly every other country. It also does not show the results of a growth-penalizing Trump administration policy that limited US population growth by restricting immigration.  All that will unfold in 2021 and beyond.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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