Perhaps nobody better captured the angst of the financial crisis better than CNBC's own Jim Cramer, who in August 2007--more than a year before the crisis reached its apex--famously ranted, "My people have been in this game for 25 years and they're losing their jobs and these firms are gonna go out of business and it's nuts. They're nuts! They know nothing! This is a different kind of market. And the Fed is asleep."
Jim was right. In fact, it's been fascinating to read Ben Bernanke's own admissions of such as I work through his latest book, which includes reflections on how the Fed, under his leadership, missed the signs that the '06-07 housing and credit squeeze would become one of the worst financial crises in history.
Bernanke says that in spring 2007, the Fed actually thought it had achieved success in navigating the tricky post-2001 "jobless recovery" period; "With a modest rise in core inflation having ended deflation concerns, it seemed possible that another soft landing had been achieved," he writes. They were, of course, mistaken--or more to the point, they were still fighting the last battle instead of seeing the new storm brewing on the horizon.
Are we at such a juncture again, but this time regarding inflation? It certainly feels like it. And once again, Jim has captured the moment. "He needs to act, and act now, with a much tougher stance," Cramer said about current Fed Chair Powell during his show last night. "He could even do 100 basis points," meaning a full-point rate hike, "and he should, after the superinflation-inspired earnings disasters we just got from Target and Walmart. Everyone should understand the urgency of the situation."
Jim added, "The longer Powell dallies with small rate hikes, the more likely we will have a crash landing, because these smaller hikes haven't slowed inflation one bit." If that risks a larger recession, good--"Powell needs to understand that the threat of a recession now, not an actual recession, but the threat of one, is the right tool for the job here and he can't do that by raising 50 basis points at time," Jim said. "A rapid series of large rate hikes would allow him to cool down the economy to where many of the shortages out there would end."
And now that we've gotten to the baby-formula-shortage stage of this cycle, combined with record high gasoline and food prices, I think the public is far more on board with this than most policy makers would typically presume. No one's happy with a state of affairs where their "raise" doesn't cover inflation, where store shelves are sporadically and unpredictably empty at times, and where they're being warned about power blackouts and possible gasoline shortages on top of everything. It's stressful and exhausting, on top of an already exhausting two years of the pandemic.
And while it's obvious the Fed is behind the curve here, they still have an opportunity to nip this in the bud before this turns into a chronic, decade-long stagflationary malaise. That's another takeaway from reading Bernanke's book and reflecting on Jim's 2007 warning; forceful action, even if it takes slightly too long, is still better than not acting, or being overly cautious to "wait and see" if problems worsen.
Economist Stephen Roach made a similar case in his appearance on Fast Money last night. Roach first started warning about stagflation two years ago; back then, he said, "I worried more about the supply side than the demand side. But now, the demand side has really gotten away from the Fed, and the Fed has a massive amount of tightening to do. The markets are not even close to discounting the full extent of what's going to be required to bring the demand side under control," he warned, "and so I think that underscores the deep hole that Jerome Powell is in."
Just look at the macro signals right now, which don't signal much of a slowdown in nominal demand. Jobless claims are still at levels consistent with strong labor market growth--and we already don't have enough workers for all the jobs needed right now. The yield curve, or difference between three-month Treasury bills and 10-year rates, is still 1.8 points steep, a sign that the Fed is nowhere near slamming the brakes on nominal demand yet.
The longer the Fed lets nominal demand run hotter than the economy can handle, the more of it will continue to be eaten up by inflation (and/or shortages) instead of translating into real GDP growth anyhow. The Fed still has a window here in which to act forcefully, before things get worse.
See you at 1 p.m!
Kelly
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