Caveat Emptor, All You Wall Street Doves

Let’s talk about the economy and Fed monetary policy. Unless Jay Powell’s Federal Reserve wants to completely politicize monetary policy and slash interest rates in order to juice the economy and re-elect President Biden, there is absolutely no reason right now for the central bank to take the foot off the brake and slam down the accelerator. A Federal Reserve governor, Christopher Waller, said yesterday that the Fed should not rush into rate cuts. He’s right. Why is he right? Well, prices are still rising, inflicting significant damage to middle- and lower-income affordability. Over the past three years, typical family wages are some 4 percent below the rise of inflation. The inflation rate itself is still above the Fed’s 2 percent target. The unemployment rate is still less than 4 percent. Retail sales, at least through the Christmas holidays, held up nicely. And the Biden administration is still running a roughly $2 trillion budget deficit, driven principally by a spending-to-GDP ratio that is nearly more than 24 percent — compared to a 50-year average of 20 percent — as they pour some $5 trillion into the economy since coming into office. There is no recession at the moment, though this could change. Yet the Atlanta Fed’s GDPNow Q4 estimate is currently 2.4 percent — not a boom, but not a bust either. There are chinks in the economic armor, most particularly a long slump in manufacturing output and jobs. If the demand side of the economy via retail sales is growing much faster than supply-side manufacturing, though, that’s a potential inflation risk. The Fed should be leery of this unbalanced economy. Meanwhile, the topline Consumer Price Index in December was 3.4 percent year-over-year. The core rate was 3.9 percent, services 5 percent, and services excluding energy 3.5 percent. Every one of them well above the Fed’s 2 percent target. Over the past three Bidenflation years, groceries are up 20 percent. Energy is up 26 percent. And new and used cars are up about 20 percent. Mortgage rates are up around 7 percent. You need $1.19 today in order to match the purchasing power of the dollar pre-pandemic. That’s a 19 percent loss in the value of your money. The dollar is still worth less than a 2,000th of an ounce of gold. Wall Street keeps jabbering about three, four, or even five Fed rate cuts. Wall Street loves easy money. Main Street does not. The Federal Reserve projections show three or more rate cuts this year, but there’s no particularly good reason for that. A recent Fed survey shows that over 90 percent of the central bank’s economists are Democrats. I’m going to make a different bet, though. I’m going to suggest that Fed head Jay Powell is an honorable man, he will not seek a third term as chair no matter who wins the Presidential election, and instead wants to establish his historical reputation as the guy who got inflation back to the central bank’s 2 percent target. It’s not exactly Volcker, because Mr. Powell was asleep for the first inflationary year. I’ll bet, though, he wants to redeem himself. Caveat emptor, all you Wall Street doves. From Mr. Kudlow’s broadcast on Fox Business Network.

Caveat Emptor, All You Wall Street Doves

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