More Credit to Cushion the Blow is Coming
Inflation Signaling: Photo-Op With Volcker
Recently, the Fed stopped referring to fictitious responsibilities like fixing climate change, black unemployment, and other extremely worthy societal problems that are neither their skill-set nor job description. Now they are Volcker-Signaling.
We had hoped this virtue-signaling during the pandemic was done to get the legacy media off their back. Sadly, that was not the case as evidenced by the same atrocious “signaling” tactic recently being used again.
This time it was used to quell fears and opiate the same media on inflation.1 The dance partners swapped out democrat Virtue-Signaling with republican Volcker-Signaling.
Weekend at Paulie’s
The Fed is now using that same photo-op signaling tactic to sell they are fighting inflation. Fed members seemingly have reanimated Paul Volcker’s corpse and are taking photographs with it in order to again signal alignment with the interests of their real constituency, the Legacy Financial media.
Powell said to Senator Shelby on Capitol Hill last month about his admiration for former Chair Volcker: “I think he was...the greatest economic public servant of the era. Shelby: So you’re prepared to do what it takes, without any reservation, to protect price stability? Powell: Yes.”
The Volcker-signalling began in Mid March. Comparing what the Fed is doing, with what Volcker actually did we know the new rhetoric does not match the behavior at all yet.
He told me he has tools. Tools?! So I said: “What is this nonsense, raise rates now Jerome…”
Volcker raised the federal funds rate from 11.2% in 1979 to 20% in June of 1981. The unemployment rate became higher than 10% during this time as well. Volcker chose to enact a policy of preemptive restraint during the economic upturn which increased the real interest rates.
If you are interested in reading what motivated Volcker to do what he did, the and the parallels with today’s environment, read this piece written in August of last year about what drove him to do what he did.
The current Fed hopes that a “neutral” rate plus transitory equals an economy heading back to 2% inflation with employment still strong. This is akin to going all-in on drawing an inside straight – a possible outcome but I wouldn’t bet on, says TS Lombard’s Steven Blitz. Let’s see if the game-play is remotely matching the cards dealt Powell.
The Federal Reserve’s rhetoric is pretty tight. The Volcker-signaling we see is one example of that. But the rhetoric is tighter than policy for sure. Lets see how different they are.
Rates Are Up, So Are Credit Card Approvals
QT, while on the surface decreases liquidity, is indirectly increasing the velocity of money held at banks causing a credit-induced inflationary spike. We talked about that at length in a previous write up two weeks ago.2
To summarize: Banks funds that were in reserve become available for loans from QT. Unless long rates go higher, the Fed must risk a hard recession to stop inflation. And that means they must ramp the IORB to slow the increase in loans coming.3
It was noted some months ago an increase in credit card applications being offered. Some wondered aloud if this wasn’t a similar tactic as used during the GFC (see chart 1) to keep the economy afloat. Turns out it was.
Continues Beneath this line, including original report…