Time to Take Away the Punchbowl?
Posted June 04, 2021
Yesterday we started discussing the Fed’s Beige Book: what it is and what it’s telling us about the current inflationary environment.
Let’s start with a quick recap.
The Beige Book is a report the Fed publishes eight times per year. In it, the 12 regional banks that comprise the Fed present anecdotal information on the U.S. economy.
Put simply, it’s the Fed’s attempt to reach out to business contacts and others to get feedback on what they are experiencing in the real world. In other words, it’s not some academic study but rather a picture of what is really happening in the world.
The March Beige Book report painted a troubling picture: “businesses in most sectors expect fairly widespread increases in the prices they pay in the months ahead…”
The most recent report saw even more concrete evidence that inflation is here and moving into consumer prices: “Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months.”
They Can’t Ignore It Forever
So the Fed is finally admitting what I’ve been saying for months, hot inflation is already here — despite the fact they’ve been trying to play it down, calling it “transitory.” Well now they’re painted into a corner with nowhere to go.
They’ll either have to start tapering their massive QE program, or face an inflationary crisis. So what are they going to do?
They’re going to taper. How do I know?
They’ve been dropping hints to the market for weeks that they’re going to need to cut back on their spending spree.
The Federal Reserve should begin discussing the time frame for paring back its bond-buying program, Philadelphia Fed President Patrick Harker said.
“I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time,” Harker said Wednesday during a virtual Women in Housing and Finance event. “When that is, that is something we need to start discussing.”
But this leads to another massive problem for them.
They know they’ve been fueling a massive bubble in the markets. They also know you can’t just take away the punchbowl at the party without some serious repercussions.
Put simply, they’re VERY aware of the chaos they could cause if they do it wrong…
“We have to be careful in removing accommodation so that we don’t create any kind of ‘taper tantrum…’”
– Philadelphia Fed President Patrick Harker
The rest of 2021 should be very interesting…
Editor, Money & Crisis