EDITOR NOTE: It’s clear by now, after a number of inflation reports that seem to have the Federal Reserve stumped as to why things are not going according to plan, that the Fed is slowly losing its “facade” of control. Many financial and banking industry experts are beginning to voice their doubts. Main Street industry leaders are hedging their bets against the Fed’s optimistic narrative. Even the IMF’s director Kristalina Georgieva is highly skeptical of the Fed’s inflationary outlook. Only those among the mainstream who drink the Fed Kool-Aid (and there are many of them) are the ones keeping the stock market rally going, as if “not fighting the Fed” and “trusting the Fed” are one and the same phrase. The Fed’s forecasting abilities are horrendous. Always has been. And before the concentrated light of mainstream skepticism melts the mask of Fed control, a moment of clarity that’s likely to trigger the next financial crisis, placing a Fed-hedge by way of safe-haven assets is perhaps the smartest allocation you can make at this time of great uncertainty and eroding monetary faith.
Another week, another economic report far worse than expectations.
As Vladimir Zernov notes:
U.S. has just released Inflation Rate and Core Inflation Rate reports for June. Inflation Rate grew by 0.9% month-over-month in June compared to analyst consensus which called for growth of just 0.5%. On a year-over-year basis, Inflation Rate increased by 5.4% compared to analyst consensus of 4.9%.
Core Inflation also exceeded analyst expectations, increasing by 4.5% year-over-year compared to analyst estimate of 4%.
Just as important as the official numbers is the growing drumbeat of Fed skepticism outside of its usual critics. This week prior to the new Consumer Price Index (CPI) report, the Wall Street Journal published the results of a survey of economists forecasting inflation higher than the Fed’s projections.
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.
The respondents on average now expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023.
That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993.
Last week, the International Monetary Fund’s (IMF) Kristalina Georgieva also warned that the Fed may be underplaying inflation risks.
The world is also keeping a close eye on the recent pickup in inflation, particularly in the U.S. We know that accelerated recovery in the US will benefit many countries through increased trade; and inflation expectations have been stable so far. Yet there is a risk of a more sustained rise in inflation or inflation expectations, which could potentially require an earlier-than-expected tightening of US monetary policy.
For an institution like the Fed, the growing recognition that its future projections are entirely unreliable is as important as troubling inflation reports. Central banks recognize that the ability to shape the narrative is a vital policy tool. A Fed whose forecasts lack credibility is a Fed in trouble and one that may be panicked to act in ways that contradict previous statements.
This explains why today’s inflation report raised market expectations that the Fed will end up increasing rates by the end of 2022, quicker than what most Fed members projected last month.
Source: Bloomberg via Tyler Durden, "Stocks, Bonds, and Bitcoin Slammed after Surgin CPI; Dollar, Rate-Hike Expectations Spike," July 13, 2021, ZeroHedge.
It should go without saying that the Fed’s issues go well beyond bad forecasting. The monetary hedonism of America’s central bank is one of the great policy disasters of the current century. Eroding mainstream confidence in the Fed’s forecasting is a factor that could help shape the timing of the next financial crisis.
Originally posted on Mises Institute