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Shocker! FOMC Discussion Surprised by Rise in Inflation

Rise in Inflation
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EDITOR NOTE: There’s never been a more dangerous individual than one who is a) absolutely clueless about a topic that b) s/he claims is an area of expertise and who has c) an awful track record in terms of being “right” in projections and solutions, and d) the power to implement policy with impunity. More so than the federal government, this profile belongs to the Federal Reserve. Based on the FOMC minutes, the Fed sought inflation but was surprised by the rate at which it had surged. This betrays an assumption that an economy is a mechanical object that can be guided, controlled. Randomness doesn’t play into the picture of this “closed system.” Negative outcomes stemming from their own erroneous or misguided assumptions are also “foreseeable” and controllable (NOT). And to all of this, inflation is a “transitory” thing...of course with the assumption that we can trust the Fed, for they have nearly 100% confidence (or arrogance?) in their own capacity to manipulate the economy.

Minutes show the Fed was surprised by a stronger-than-expected surge in inflation.

Key Points in the FOMC June Minutes

Inquiring minds are digging into the Minutes of the June Federal Open Market Committee Minutes for clues on inflation (emphasis mine).

  • In their discussions on inflation, participants stated that they had expected inflation to move above 2 percent in the near term, in part as the drop in prices from early in the pandemic fell out of the calculation and past increases in oil prices passed through to consumer energy prices. 
  • However, participants remarked that the actual rise in inflation was larger than anticipated, with the 12-month change in the PCE price index reaching 3.6 percent in April. 
  • Participants attributed the upside surprise to more widespread supply constraints in product and labor markets than they had anticipated and to a larger-than-expected surge in consumer demand as the economy reopened. 
  • Most participants observed that the largest contributors to the rise in measured inflation were sectors affected by supply bottlenecks or sectors where price levels were rebounding from levels depressed by the pandemic. 
  • Looking ahead, participants generally expected inflation to ease as the effect of these transitory factors dissipated, but several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year.
  • Several participants noted that, during the early months of the reopening, uncertainty remained too high to accurately assess how long inflation pressures will be sustained. 
  • Participants noted that overall financial conditions remained highly accommodative, in part reflecting the stance of monetary policy, which continued to deliver appropriate support to the economy. Several participants highlighted, however, that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.
  • Although inflation had risen more than anticipated, the increase was seen as largely reflecting temporary factors, and participants expected inflation to decline toward the Committee's 2 percent longer-run objective.
  • Various participants offered their views on the Committee's agency MBS purchases. Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing marketsSeveral other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable because this approach would be well aligned with the Committee's previous communications or because purchases of Treasury securities and MBS both provide accommodation through their influence on broader financial conditions.

Original post from Mish Talk

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