The Fed Is Driving Using The Rear View Mirror
The Fed Is Repeating Their Massive Policy Mistake
The Fed made a huge mistake in 2020 and 2021 by keeping interest rates at zero and doubling the supply of money in spite of evidence that the economy was rebounding.
They compounded the mistake by keeping the money spigot running even when the Federal government was sending out a trillion dollars of government cheese to all Americans.
Is the Fed now making a similar massive mistake?
The short answer is yes.
They are realizing that their Drunken Sailor monetary policy led to inflation and now they are hiking rates in a dramatic function to stem the inflation.
Here's what their new mistakes are:
• The economy is already in a recession so they might not have to be so aggressive
• Their aggression is boosting the dollar which will lead to a financial and economic crisis overseas, particularly in emerging markets
• They don't believe the economy is in recession because the labor market is still tight. They are ignoring the fact that the labor market is a lagging indicator of the econmy.
The chart shows the rate of initial jobless claims. Jobless claims are when a person first files for unemployment insurance from a state. As you can see, it is a very low number right now. This indicates that people are getting jobs rather than applying for unemployment. This is an indicator of a tight labor market.
This, and the high numbers of jobs created and the low unemployment rate, are keeping the Fed tightening. They look at those numbers and see a very tight labor market and conclude that the economy is tight.
But labor indicators are lagging indicators of the economy! Not leading.
Leading indictors are saying we are in a recession and going to continue in a recession for some time. That means that the labor market will likely start to weaken early next year.
But, by then, the housing market will be flat on it's back. The auto industry will be laying off people. The economy will be in a deep recession.
At the same time, inflation will be about where it is today. Volatile factors will be declining but sticky factors will still be rising.
The real question is what will the Fed do then? Ease to help the labor market or keep tightening to crush inflation.
I suspect they will ease and trigger another bout of higher inflation.
But, as always, how do we make money from this.
I am still short the stock market and junk bonds. Certain sectors are going to get hit hard.
I like the long side of the dollar and the short side of gold.
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