{"id":23820,"date":"2021-01-23T04:31:12","date_gmt":"2021-01-23T04:31:12","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=23820"},"modified":"2021-01-23T04:47:06","modified_gmt":"2021-01-23T04:47:06","slug":"can-the-fed-keep-a-lid-on-inflation","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2021\/01\/23\/can-the-fed-keep-a-lid-on-inflation\/","title":{"rendered":"Can the Fed keep a lid on inflation?"},"content":{"rendered":"

Jeremy Siegel, Wharton finance professor, says the Fed has poured a tremendous amount of money into the economy in response to the pandemic, which will eventually cause higher inflation. David Rosenberg of Rosenberg Research argues that velocity of money is declining and the US economy has a large output gap so inflation is unlikely to materialize.<\/p>\n

\"CNBCClick to play<\/em><\/a><\/p>\n

Both are right, just in different time frames.<\/p>\n

Putting the cart before the horse<\/h2>\n

The velocity of money is simply the ratio of GDP to the money supply. Fluctuations in the velocity of money have more to do with fluctuations in GDP than in the money supply. If GDP recovers, so will the velocity of money. Equating velocity of money with inflation is putting the cart before the horse. Contractions in GDP coincide with low\/negative inflation while rapid expansions in GDP are normally accompanied, after a lag, by rising inflation.<\/p>\n

\"CPI<\/p>\n

Money supply and interest rates<\/h2>\n

Inflation is likely to rise when consumption grows at a faster rate than output. Prices rise when supply is scarce \u2014 when we consume more than we produce. Interest rates play a key role in this.<\/p>\n

Low interest rates mean cheap credit, making it easy for people to borrow and consume more than they earn. Low rates also boost the stock market, raising corporate earnings because of lower interest costs, but most importantly, raising earnings multiples as the cost of capital falls. Speculators also take advantage of low interest rates to leverage their investments, driving up prices.<\/p>\n

\"S&P<\/p>\n

In the housing market, prices rise as cheap mortgage finance attracts buyers, pushing up demand and facilitating greater leverage.<\/p>\n

\"Housing:<\/p>\n

Wealth effect<\/h3>\n

Higher stock and house prices create a wealth effect. Consumers are more ready to borrow and spend when they feel wealthier.<\/p>\n

High interest rates, on the other hand, have the exact opposite effect. Credit is expensive and consumption falls. Speculation fades as stock earnings multiples fall and housing buyers are scarce.<\/p>\n

Money supply is only a factor in inflation to the extent that it affects interest rates. There is also a lag between lower interest rates and rising consumption. It takes time for consumers and investors to rebuild confidence after an economic contraction.<\/p>\n

The role of the Fed<\/h2>\n

Fed Chairman, William McChesney Martin, described the role of the Federal Reserve as:<\/p>\n

“…..to take away the punch bowl just as the party gets going.”<\/p><\/blockquote>\n

In other words, to raise interest rates just as the economic recovery starts to build up steam \u2014 to avoid a build up of inflationary pressures.<\/p>\n

The Fed’s mandate is to maintain stable prices but there are times, like the present, when their hands are tied.<\/p>\n

Federal government debt is currently above 120% of GDP.<\/p>\n

\"Federal<\/p>\n

GDP is likely to rise as the economy recovers but so is federal debt as the government injects more stimulus and embarks on an infrastructure program to lift the economy.<\/p>\n

With federal debt at record levels of GDP, raising interest rates could blow the federal deficit wide open as the cost of servicing Treasury debt threatens to overtake tax revenues.<\/p>\n

Conclusion<\/h2>\n

Inflation is likely to remain low until GDP recovers. But the need to maintain low interest rates \u2014 to support Treasury markets and keep a lid on the federal deficit \u2014 will then hamper the Fed’s ability to contain a buildup of inflationary pressure.<\/p>\n","protected":false},"excerpt":{"rendered":"

Jeremy Siegel, Wharton finance professor, says the Fed has poured a tremendous amount of money into the economy in response to the pandemic, which will eventually cause higher inflation. David Rosenberg of Rosenberg Research argues that velocity of money is declining and the US economy has a large output gap so inflation is unlikely to … <\/p>\n

Continue reading “Can the Fed keep a lid on inflation?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,45,3761,10,13,57,34],"tags":[4079,854,4685,4228,1524,1746,1828,1858,4684,3010],"class_list":["post-23820","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-debt-levels","category-gdp-and-activity","category-housing-economy","category-inflation-economy","category-stock-markets","category-us-canada-countries-regions","tag-building-permits","tag-cpi","tag-fed-mandate","tag-federal-debt","tag-gdp","tag-housing-starts","tag-inflation","tag-interest-rates","tag-money-velocity","tag-sp-500"],"yoast_head":"\nCan the Fed keep a lid on inflation? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Can the Fed keep a lid on inflation? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Jeremy Siegel, Wharton finance professor, says the Fed has poured a tremendous amount of money into the economy in response to the pandemic, which will eventually cause higher inflation. 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The FOMC statement reiterates that inflation is seen as the primary threat and the Fed will continue to tighten -- until something breaks. GDP Real GDP has\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Real GDP & Hours Worked","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-29-realgdp-hours-qtr.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-29-realgdp-hours-qtr.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-29-realgdp-hours-qtr.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":20236,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/04\/11\/gold-and-the-great-inflation\/","url_meta":{"origin":23820,"position":1},"title":"Gold and The Great Inflation","author":"Colin Twiggs","date":"April 11, 2020","format":false,"excerpt":"There are clear signs that the US is headed for an economic contraction this year. The New York Fed's Weekly Economic Index plunged to -8.89% on March 21st, compared to its -4.01% low from February 28th, 2009. Jim Stock expands on reasons for the fall: \"Today\u2019s decline is driven by\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":27294,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/08\/10\/liquidity-inflation\/","url_meta":{"origin":23820,"position":2},"title":"Liquidity & inflation","author":"Colin Twiggs","date":"August 10, 2021","format":false,"excerpt":"There have been several recent comments in the media remarking that liquidity is drying up because M2 money supply growth has stalled. No. Liquidity is not drying up -- as this long-term chart of GDP against the M2 money supply1 shows. Ever since the global financial crisis in 2008-09, the\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":34792,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/07\/20\/the-feds-money-supply-headache\/","url_meta":{"origin":23820,"position":3},"title":"The Fed’s money supply headache","author":"Colin Twiggs","date":"July 20, 2022","format":false,"excerpt":"Gerard Minack was kind enough to submit his comments on our recent newsletter regarding inflation: Jay Powell is selling but the bond market isn\u2019t buying. There is a lot that we agree on but there are also differences that are worth examining. Inflation is largely a reflection of excess fiscal\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/minack-netlending-wealth.png?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":27803,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/09\/09\/low-interest-rates-and-the-debt-trap\/","url_meta":{"origin":23820,"position":4},"title":"Low interest rates and the debt trap","author":"Colin Twiggs","date":"September 9, 2021","format":false,"excerpt":"Since 1980, debt levels have more than doubled, from 1.4 times GDP to more than 2.8 in Q1 this year. The rise has been facilitated (and encouraged) by a sharp fall in long-term interest rates, with 10-year Treasury yields falling from a peak of close to 16% in September 1981\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":16026,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/10\/23\/should-we-worry-that-velocity-of-money-is-plunging\/","url_meta":{"origin":23820,"position":5},"title":"Should we Worry that Velocity of Money is plunging?","author":"Colin Twiggs","date":"October 23, 2017","format":false,"excerpt":"Some writers have attributed slow GDP growth in the US to the plunging velocity of money. In layman's terms, the velocity of money is the ratio between your bank balance and the amount you spend. For the economy as a whole, it is measured as the ratio of GDP (or\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23820","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=23820"}],"version-history":[{"count":4,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23820\/revisions"}],"predecessor-version":[{"id":23824,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23820\/revisions\/23824"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=23820"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=23820"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=23820"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}