EXPANDED: HIGHER INFLATION TOLERANCE IS COMING
2024 is launch date
TL; DR
If the Fed cannot get inflation to 2%, they will raise their target
Last week The Fed’s press conduit implied they are already considering it
BOA’s Michael Hartnett floated it one week later
If they raise the inflation target things will soar first then get much worse
The Fed will then rationalize their decision like was done in the 1970s.
If this plays out, 2022 will be like 1972 and nothing like 1979
The Inflation Target is Slowly Moving
The chances of increasing the inflation target rate are materially growing now. We got our first hint at it last week, even if indirectly. Why? Because Jason Furman is now being quoted with Fed folks in rate hike risk parameters.
Nick Timiraos, quoting Jason Furman and noted by ZH: “A half-point hike at this meeting would result in a dramatic loosening of financial conditions no matter what language they paired it with,” said jason furman “But by December, you can keep financial conditions very restrictive even with 50.” 9:15 AM ∙ Oct 21, 2022
ZH’s comment on this statement? Jason Furman proposed raising the inflation target. It’s coming. Note: we are being directed to Furman's work by a WSJ reporter with the Feds ear. When it comes is unknown. Do they want to announce it preemptively (doubtful), or when things get crisis-like ( risky)? We don’t know. But it is coming. When it does, stocks and commodities will moon shot.
Jason Furman: Either You are Fired or Stuff Costs More
Jason Furman is the guy a month or so ago who made his opinion known that inflation should be allowed to range higher than the 2% target. We did a write up of it back then paralleling our contention that inflation at 2% was a fairy tale.
Jason Furman’s September Explanation…
He said then: ``Either inflation will stay substantially higher, or we will have higher unemployment (6.5%) and a substantial economic slowdown.” Brooking Institute paper
Meanwhile on July 28th GoldFix wrote to subscribers in: Two Percent Inflation is a fairy tale
Either inflation normalizes at a significantly higher baseline, unemployment normalizes as being “full employment” closer to 5 or 6%, or we get a torrid stagflationary recession worse3 than the 1970s as the market resets itself -Source
We said then either the Real Fed Funds Rate Must Follow Labor Demand or Sticky Inflation ensues. Risk, however, being that if real rates did rise too much stocks would crash. That is what is happening. Higher real rates kill inflation, but kill the economy (and employment) much sooner.
Therefore a new dynamic equilibrium must be tolerated for now between the economy, unemployment, and the acceptable inflation level.
BOA’s Hartnett is First Analyst To Say It.
On Friday BOA released their weekly “flow show” report in which Michael Hartnett updates clients on weekly goings-on and outlook going forward. In that report, and easy to miss, was a comment about inflation targets. They believe several asset classes are vulnerable if unemployment rises concurrent with credit spreads widening. (Emphasis ours)
[The] most vulnerable assets to own are Big Tech… & more controversially commodities … despite high inflation and/or narrative of ‘23 cycle ending with…very likely new Fed inflation target of 3% in ‘24/’25
To the best of our ability he was saying: among other asset classes, Commodities will also suffer in the next leg lower (“controversially” implies maybe not as much as stocks) absent a Powell Pivot. But it will all end with inflation targets being raised (and/or YCC implementation) as the equity selloff gains momentum and likely re-bolster things in 2024. We think the inflation target will be raised before then, but
Zerohedge (first to note the possibility of this in June) puts it in actionable terms in "Very Likely The Fed Will Raise Its Inflation Target To 3% In 2024"
[F]or those, who like Hartnett believe job losses mean new highs in spreads, "it’s a bear market rally, lows yet to be seen" and according to Hartnett, most vulnerable assets to own are: Big Tech (positioning + secular loser),REITs (inflation hedge), US dollar (peak yields); Yield curve steepeners [ and] Commodities.
So, assume the target will be raised sometime if stocks crater while unemployment rises and the Fed “holds fast”.
One Possible Path to a Boom
We’re looking at it like this: Credit spreads will widen and accelerate the next major bear leg lower if it comes. That credit problem may actually occur before unemployment seriously upticks (post midterm revisions aside).
Then we get self-reinforcing cycles of high unemployment, low GDP and still relatively sticky inflation. Powell will then likely be forced to Pivot in a credit induced wash-out and the inflation target will also be raised. But as to asset class performance, we defer to Hartnett. We’ve also started looking at inflation and unemployment met dynamic as a combined number to better reflect the dynamic equilibrium changes enveloping us now.
Continues includes Hartnett’s comment…