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Daily update

  • The Federal Reserve is expected to hike rates a final time. Arguably this has been the most poorly managed tightening cycle since Fed Chair Burns in the 1970s. What went wrong?
  • The relentless “hike, hike, hike” mentality defies rationality. Monetary policy needed to be tightened after the pandemic. Hiking without pausing to assess the damage was unwise. Hiking without recognizing that data is substantially less reliable was unwise. The current banking system volatility may be due more to easing regulations in 2018, but relentlessly raising rates has not helped. The Fed now has bank lending tightening it does not control in an economy it does not properly understand.
  • Inflation has been extremely unusual. The first wave of transitory, demand-led inflation is now in deflation. The second wave of energy, supply-led inflation is now in disinflation (oil prices fell further yesterday). The third wave of profit-led inflation continues at the end of supply chains. Former Fed Chairs Greenspan, Bernanke, or Yellen would have offered innovative solutions. Powell seems to lack the confidence to go beyond a conventional, economics 101 response.
  • The debt ceiling farce continues. In the near term, the main cost of this is that it consumes the scarcest commodity in Washington—time.

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