Time to get off the “Jay-Train?”

Last Friday’s employment numbers were underwhelming to say the least. 

Nonfarm payrolls came in at 194K for September, well off the 500K consensus estimate. The August number was revised up by an additional 131K jobs, which took a little sting out of the number. 

The unemployment rate (notoriously manipulated) came in better than expected at 4.8%.

All in all, the market shrugged it off.

Employment numbers were once the center of the universe where economic reports went. These days they’ve lost their heavyweight title to another set of numbers.

And they’re coming out starting tomorrow…

Inflation is Now the Name of the Game

As the pandemic of 2020 locked the U.S. and its economy down, prices across the board cratered as consumer spending pretty much dried up (toilet paper and hand sanitizer notwithstanding).

But once we were largely convinced that the end of the world wasn’t at hand, prices of goods as tracked by the BLS bottomed and rebounded. In fact, they’ve soared. 

Inflation skyrocketed to 5.4% in June and July and held steady at 5.3% in August. 

Core inflation (the euphemism the Fed uses to describe inflation when you take out food and energy prices) has been only slightly tamer spiking to 4.5% in June to pull back to 4% in August.

At an inflation rate of 5.3%, prices would double in roughly 13 years. (If prices seem to be moving a little faster at the grocery store, you can draw your own conclusions…) 

The Threat of Inflation is More than Economic

Fed Chair Jerome “Jay” Powell has done his level best to portray this massive spike in inflation as something “transitory.” The expected product of a screwed up supply chain that will subside on its own once economies start operating at full capacity again. 

There are two problems with his assessment of the situation. 

First, he doesn’t offer any definition of what “transitory” really means. In the right context, you could call the last ice age “transitory.” By using these kinds of vague terms (which is typical where Fed-speak goes) it allows the central bankers to basically do nothing while appearing to be in the driver’s seat. 

The second problem is worse.

As much as it is an economic phenomenon, inflation is also a political one. 

Given even the tidal wave of crises our country is currently dealing with, from geo-political relations, to border issues, to pandemic issues, there are few issues more important to the American public than those that impact their pocketbooks.  

The motto “It’s the economy stupid” wins elections for a reason. 

There are midterm elections next year.

And the current inflationary state of affairs needs to be dealt with.

Because when people are seeing prices at the grocery store rise before their very eyes, things likely won’t bode well for the incumbents at the ballot box. 

Jumping Off the “Jay-Train”

I’m of the opinion right now that other Fed mouthpieces have already begun (or will start shortly) to distance themselves from Chairman Powell’s ongoing assertion that inflation is only transitory. And that they’ll start talking higher rates sooner rather than later. 

There are only two reasons for the Fed to raise interest rates.

The first is because all their “mission” criteria have been met (unemployment and inflation are both under control). The second is because they’re not and inflation is getting out of hand. 

The former simply isn’t the case today. The latter on the other hand has become quite apparent.

Staring down the current wave of inflation, there are essentially two courses of action the Fed can take to rein things in.

The first is to “taper” their monthly QE program. For nearly two years, the Fed has been buying $120 billion in bonds every month. Cutting back that spending would likely send both treasury yields as well as the mortgage rate market higher. (It would also give the stock market pause to reconsider its current upward trajectory.)

That may be enough to put a lid on the upward spiral in prices. 

The other option would be to start hiking interest rates. Frankly that’s the only way to slam the brakes on inflation.

But here’s what you should know if you want an idea of what the Fed is REALLY thinking about inflation. 

First, if they start hiking rates before they completely eliminate QE spending, it’ll essentially mean that the Fed is PETRIFIED of the inflation levels that may be on the way.

The other indication will be the velocity with which they move to raise rates.

Bumping them 25 basis points would likely be meaningless to the market. But a move of 50 or 75 would be a massive shock.

And here’s where things start to get really interesting. I’ll tell you all about it in my next email. Until then…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily