Intractable Inflation

The Fed mistakenly believes it can control the rate of inflation with relative ease. While it believes it is far easier to fight a rising rate of inflation than deflation, it is still completely convinced the puppet strings of extant price levels rest firmly in its hands.

To start with, the academics that sit on the FOMC don't actually know what causes consumer price inflation (CPI)—or at least that don't want to admit to its actual progenitor. The Fed has been historically wedded to the belief that CPI is related to the unemployment rate. This is known as the Phillips Curve. Phillips curve analysis relies on the belief that inflation comes from a low unemployment rate and that deflation comes from a high level of unemployment. But this logic is both simplistic and specious in nature. Indeed, throughout history, it is commonplace to have a rising rate of unemployment associated with higher rates of inflation and a falling unemployment rate correlated with low rates of inflation.

Inflation is not caused by how many people are successfully employed in gainful and productive work. It is the result of degradation in the faith of a fiat currency's purchasing power. Such a loss can come from a nation losing the ability to defend itself. More often, a currency begins a protracted and significant erosion when extreme fiscal profligacy causes an insolvent government to begin massively monetize its own debt.  

What we now all should be fully aware of is that the Powell Fed will keep interest rates at zero percent and will continue Q.E. until inflation runs well above the 2% target. He learned a painful lesson in 2019 when the FFR was raised to just 2.5%, and the stock market and economy began to fall apart. The FOMC is now extremely reticent to raise rates and is not "even thinking about thinking about raising interest rates." Hence, its target rate has become completely symmetrical. Meaning, it very well may have to go above 2% for the same duration and extent that it went below the target rate. The Fed's balance will continue to explode higher until holders of USD become convinced that its value will erode on a perpetual basis with a floor of at least 2% per annum.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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