The Fed’s Strategy Is An Own Goal

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During their latest episode of the VALUE: After Hours Podcast, Harvey, Taylor, and Carlisle discuss The Fed’s Strategy Is An Own Goal. Here’s an excerpt from the episode:

Campbell: Let me also say that, if we do go into recession– I’ve called this the Fed strategy, an own goal. [Jake laughs] Then I was told, “Well, Americans don’t really know what that means. Everybody in Europe knows what that means.” Let me explain what I mean by that. So, the reason to increase rates overwhelmingly is inflation. But if you look at the last nine months, inflation is running at 3.2%. That’s not 2, but it’s close. Then more importantly, what is driving that inflation? That inflation is being driven by shelter or housing. So, 70% of that inflation is coming from housing. The Fed made this mistake before that inflation was going up and they were saying, “Oh, well, this is temporary, it’s no big deal.”

I’m looking at the data. Housing and rentals are up double digit, but that was not being reflected in the CPI. So, housing enters with a lag. The intuition for listeners is real simple, think about you’re in a lease and you’re locked in, and then all of a sudden, rental inflation goes up by 15%. Well, you’re locked in. If your lease is a month old and there’s annual lease, then inflation is zero for you for the next 11 months, but then when it comes off, you’re going to suffer the 15% and it goes into the data. So, shelter is this lagging indicator. Again, it was the Fed’s mistake not to see that the inflation was going to be way more permanent because of the housing inflation.

So, today, so we’ve got inflation of 3.2% over the last nine months. That’s annualized 3.2%. But look at the housing market. So, housing prices are going down, rentals are going down. It’s the same story that it will take up to a year for that to work its way into the CPI. In my opinion and also, just by the way, shelter is 33% of the CPI and 40% of the Fed’s favorite indicator of the personal consumption expenditure deflator. So, to me, there’s not a good reason to keep on hiking. All we do is to increase the probability of a problem with the financial system and increase the probability of a recession. Not just a technical recession, but a potential hard landing recession.

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