EC Fed’s Tools Are Broken

The U.S. central bank has metastasized from an institution that was originally designed to assist distressed banks, to one that believes its purview now includes perpetuating asset bubbles, fighting global warming and reconciling racial inequities. Another distortion of the original purpose of the Fed is that its mandate has changed from providing stable prices and full employment, to creating an inflation rate above 2% for a period of time equivalent to the duration it was below that level.

pink and blue pig figurine

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But the members of the FOMC claim there is nothing to fear if inflation were to ever grow too hot because it has the tools to bring it under control. In other words, when necessary, the FOMC can not only stop QE but it can raise rates aggressively enough to vanquish inflation without destroying the markets and economy along the way. Let’s see just how true this contention really is. 

But before we get to how “successful” the fed will be to tame inflation, a funny thing happened on the way to achieve its 2% goal. Our central bank focuses on the incredibly distorted core rate of inflation found in the Personal Consumption Expenditures Price Index. But meanwhile, prices are surging in the real world. For instance, headline PCE inflation increased by 3.65% year over year in April. And even in the fed's preferred metric, prices jumped by 3.1% y/y. Not only this, but a slightly less massaged reading of inflation, which can be found in the headline CPI metric, had prices rising by 4.2% y/y.

If you want an even more accurate view of the current rate of inflation just look at home prices, which are up 21% y/y, according to Redfin data. Also, the 19 commodities in the CRB Index have soared by over 60% in the past 12 months. Safe to say, the actual rate of inflation is already far above the Fed’s inane 2% target. 

These absurd inflation rates were brought about by paying citizens $6 trillion between 3/20-3/21 to lay fallow at home and not produce goods and services. Hence, creating supply shortages; and a huge void to absorb the massive liquidity wave. Therefore, the rate of inflation has already climbed to a point that is dramatically destabilizing to the economy. This is the conundrum for our Treasury and Fed: keep printing money and cause inflation to run intractable, which will destroy the stock market and the economy. Or, stop monetizing debt and let the gravitational forces of deflation implode the gargantuan asset bubbles. Given the history of the Fed, it is clear Mr. Powell will soon try to once again convince investors that the U.S. economy has healed and it’s time to normalize monetary policy.

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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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