2021. Inflation took its biggest jump in more than 30 years. It's

hitting specific parts of the economy hardest. drivers face a

59% increase in the pump compared to one year ago. The

average US vehicle is selling for 26% more than it was a year

ago. vacation homes are renting out a premium to

nobody likes to play. Nobody wants to pay higher prices for

anything really

maintaining stable prices is one of the Federal Reserve's main

responsibilities. In recent decades. The economy is home

below the central bank's target rate.

Now post pandemic, the Fed they want inflation at least for a

while to be above 2%. And they'll get exactly what they

want simply because of the acceleration rent growth.

Critics say there are signs of turmoil in the economy that the

Fed isn't hearing.

I think it's pretty darn clear that the Fed cannot control

inflation on the downside or the upside. Given the current

experience

central bank has its defenders to

the weight of the evidence is finally going pals way teen

transitory is going to win. There's a

lot of reasons to think that inflation is transitory. It

doesn't mean it's going to be two months it could be a year,

but it's not going to be four or 5% a year for the next five

years.

In the backdrop, governments are spending big to keep society

afloat. The US Treasuries debt is managed by the Fed, the

bank's assets swelled as it printed trillions of dollars to

backstop the country. Which leads to the question, can the

federal reserve control inflation? And if so, what could

it do to rein in the cost of living in the United States the

people who manage the US economy prefer to keep inflation around

2%. That's because a low and steady rate produces a healthy

business environment. These rates are tracked in categories

like food, energy and housing. These components are then

weighted against one another to establish their importance. The

final scores that are produced are then recorded over time. The

primary one you hear about on the news is called the consumer

price index. It tracks all of the spending from 93% of the US

population. Then there's the trimmed mean inflation, which

throws out outlier data and focuses on core prices.

movements in the trimmed mean signal a more potent

inflationary trend, then there's the PCE,

the Fed really prefers

to look at PCE that is personal consumption expenditures Price

Index,

the Feds preferred measure of inflation is broader than the

trimmed mean, but it throws out some data from the energy and

food sectors. That's because prices take bigger swings in

these industries more frequently, what's included and

what's excluded from each inflation index impacts its

reliability. Some like Danielle DiMartino booth, a former Dallas

Fed employee believe that the PCE is flawed. My biggest

issue with the PCE is that for your average American household,

you spend between 40 and 50% of your income on housing. If you

look at it through that simple of a prison and understand that

the PCs input for housing is only around 22% Then you see

that you're under accounting households biggest expense by a

wide margin.

In the fall of 2021, the PCE numbers spiked to generational

highs. When events like that happen, public officials turn to

the Fed for answers. The Federal Reserve was originally set up to

create a stable American banking system. Its role has expanded

over its century long existence in 1977. Congress gave it a dual

mandate.

Part of that mandate is to maximize employment. The other

part of that mandate is to stabilize prices or to basically

keep inflation in check.

Wilson says that the feds ability to manage inflation

depends on the extent to which inflation is driven by the labor

market. We're currently

seeing inflationary pressures, largely because people have

shifted their consumption from purchase of services the

purchase of goods that has caused demand for goods that

outpaced the supply of goods, you know, a period of time that

suppliers did not have adequate time to really respond to that

increased demand.

In 2021, a sputtering global supply chain and backed up ports

are causing delays. Many people, including the leaders of the

Fed, don't believe the economy has settled. Chair Powell

previously said this bout of inflation is transitory. But now

he's walking back from using that language, we

tend to use it to mean that it won't leave a permanent mark in

the form of higher inflation. I think it's it's probably a good

time to retire that that word and try to explain more clearly

what we mean.

The central bank believes current conditions don't change

the long term outlook. That's because in recent years,

inflation has actually been lower than what the Fed wanted

pre pandemic inflation was a soft Fed Reserve at a 2%

inflation target. It was below 2%. Now post pandemic the Fed

has been saying they changed their their thinking here they

want in At least for a while to be above 2%. And they'll get

exactly what they want simply because of the acceleration and

rent growth.

In 2019. Newly elected chair Powell argued that long term

expectations of inflation were low. Experts observing the labor

market reported that the interest rate lift off that

began in 2019, cut the recovery short, then an unexpected event,

the pandemic pushed the central bank to create accommodative

financial conditions. That means dropping interest rates, which

in theory will make prices rise more quickly.

Nobody likes inflation. Nobody wants to pay higher prices for

anything really,

economists believe that expectations are the primary

driver of inflation.

When people think inflation is going to be high for a long

time, they're gonna say, Hey, Mr. employer, you got to pay me

a bigger gotta give me a bigger pay increase because inflation

is going to be high. And the businessman says if he thinks

that he or she thinks inflation is going to be high, as they

find no problem, I'll give you the bigger pay increase, but and

then I'll pass along the higher price increase to consumers. And

then lo and behold, people's expectations, their views of the

future inflation actually results in higher inflation.

That's the problem.

A wage raise means a corresponding rise in prices,

unless productivity is increased proportionately. What do you

want a guy with forearms.

But even people within the Fed think these models are broken.

In September 2021, a senior economist at the Board of

Governors published a paper it was titled, Why do we think that

inflation expectations mattered for inflation?

That's definitely a non consensus view.

The paper argues that the field of mainstream economics provides

cover for a quote, criminally oppressive, unsustainable, and

unjust social order. The paper reflects the views of a wider

movement of people who think the Fed needs reform.

There was an internal debate inside the Fed in 2008, in 2009,

in 2010, why did we miss the financial crisis? Why did we

miss the subprime crisis, and it was determined at the time that

the feds inflation model really was broken, because had it

incorporated securities prices had it improperly incorporated

that the price of housing residential real estate, then

the Fed wouldn't have been blindsided ahead of the

financial crisis. So what they did after writing all these

internal white papers and determining that they needed a

new inflation regime was nothing. And because they needed

this broken model to hide behind, which systematically

understates inflation, so that they could keep easier monetary

policy than they would otherwise to prop up the stock market.

Many people who watched the Fed cite breakdowns in models like

the Phillips Curve. The Phillips Curve is a model that economists

use to make interest rate decisions. The model contains

two inputs, inflation rates, and employment data, various forces

shift where the economy is along the curve at any point. When the

employment indicators point to a tight labor market, the plot of

the Phillips curve shifts to the left. That means that there are

more jobs open than there are workers to fill the roles. That

also increases the pressure on employers to raise wages, which

means higher rates of inflation. The Fed can control inflation,

when it's coming from the labor market.

Their main tool for doing that is the federal funds rate. And

by lowering that rate, it tends to help to spur economic growth

and job creation. And when they raise that rate, it tends to

slow that growth and the resulting job creation. The

reason for doing that would be if there were concerns about

inflation going too fast or potentially getting out of

control, because the unemployment rate is too low,

and starting to put upward pressure on prices. Because

there is upward pressure on.

Some economists believe that in 2019, the official models

produced an error that year, unemployment dropped to 3.5%.

When unemployment gets this low, the Phillips curve tells us that

prices should start to rise. The Fed started to hike interest

rates before sending them back down in the pandemic.

I think one of the things that we have learned coming out of

that recession and more recently is that the economy has probably

been further from what would be a genuine level of full

employment.

Some say that the failure to lift off interest rates is a

mistake that the country will have to pay for in the future.

Jay Powell in 2018 2019, found out that he couldn't raise

interest rates so he failed to get interest rates to his his

own personal state at targeted 3%. He never got to when you

have a federal reserve that one cycle after another. They try to

resolve An underlying issue of over indebtedness, whether it

was the household sector before the financial crisis, or the

corporate sector before Covid hit, every time they have a

crisis hit, they try and solve the problem of over

indebtedness. By putting more debt into the economy. Others

still

believe that the country is in an extraordinary time that calls

for emergency measures,

the current environment that we find ourselves in is extremely

unusual. All of that really is affecting inflation in a way

that we wouldn't typically see, during the normal course of how

the economy functions.

In recent decades, outside forces changed labor in

fundamental ways,

when unions were a force to be reckoned with. And when

employees had the upper hand, then there was a very tight

relationship between inflation and wage inflation. So you can

have this spiral of rising wages when we started to de unionize

the country, when employers started to outsource to India

and other countries and started exporting deflation, because its

labor was so much cheaper. All of these elements ended up

giving employers, the upper hand over employees in America. So

the efficacy of the Phillips Curve started to become kind of

outmoded. And there wasn't this immediate feedback effect from

rising prices into rising wages,

policy decisions, informed by models, like the Phillips Curve

have had a real impact on American workers.

The wages and benefits of a typical worker were suppressed

in that period for decades after 1979. Why is that? Well, it's

not because the economy was doing poorly or because of

automation, or because of low productivity growth. In fact, it

was because of policies, which generated a situation where

wages were suppressed excessive unemployment because of failed

macroeconomic policy, monetary and fiscal policy to the bashing

of unions to decline in union membership, that failure to

increase the minimum wage and along with inflation, various

new policies of corporations, forcing people to sign non

competes and forced arbitration agreements.

As a result, leaders are making adjustments to prepare for the

new normal and longer term

inflation expectations, which we have long seen as an important

driver of actual inflation. And global disinflationary

pressures, may have been holding down inflation more than was

generally anticipated

president by nominated Powell for a second term, hoping that

would help the Fed maintain its independence by nominating

Jerome Powell. That'll be important, as the group embarks

on a new and unusual decade.

So I think the strategy that the Fed is now pursuing is the

stated stated strategy is to try to keep the job market really