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Curving Toward Stagflation
August 12, 2022
The latest data shows inflation is still with us at an 8.5% annual rate. That means we can expect the Fed to keep tightening, trying to reduce demand and relieve pressure on consumer prices.
At the same time, we’ve seen declining GDP growth the last two quarters. Some people raise measurement issues. Fine. Grant that and you can say we have stagnant GDP growth. These weak numbers certainly don’t suggest an urgent need to “cool” the economy. But that’s what the Fed is doing.
Markets evidently think the Fed will stop hiking sooner rather than later. They are literally not paying attention to what multiple Fed officials are saying in speeches all over the country. Let’s look at what normally uber-dove Neel Kashkari says:
“The idea that we’re going to start cutting rates early next year, when inflation is very likely going to be well in excess of our target, I just think it’s unrealistic,” Minneapolis Fed president Neel Kashkari said.
He further stated that, “I think a much more likely scenario is we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates.” He went on to state that the Fed “is far away from declaring victory on inflation, and while this is the first hint that price movements are moving in the right direction, it doesn’t change my path for rates.”
We have a name for concurrent inflation and recession: stagflation. That term arose...
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