I declared victory on my reflation call yesterday. The main practical value of that call was not that inflation expectations would go up, although they have slightly very recently. The main practical value was that the Fed would be slower to raise rates than expected by people who thought the Fed was aiming at merely 2% inflation, even in the late cycle.
From here on in, and actually beginning a while ago, the inflation expectation part is probably more interesting than the Fed rates thing. (The Fed can perhaps raise rates without putting at risk its intention of getting above 2% inflation in the late cycle.) The risks around the call for higher breakevens seems to have gone up, not just because breakevens have widened a bit, but because the pressure that the Putin-Trump team would put on the Fed seems an unknown.
The official position of the Republican Party, which Putin-Trump seems to have accepted, is that US monetary policy is far too easy, will cause “inflation” (which is already too high) and just gives all the money to the
Jews rich guys.
It is totally batshit crazy and unhinged from reality, as often. But who knows what these guys might do? Maybe PT could have a total mental lapse and put John Taylor, Martin Feldstein or Gary Busey on the FOMC? That might tilt the inflation path lower.*
On the other hand, it has been profitable over the years not to take Fed officials at their word and to try to figure out instead what they really believe. This occasionally comes across as “conspiracy theory”, but better to take that risk than to be the standard-issue gullible Fed watcher.
It seems to me that one would apply this skepticism in spades to the GOP and its leadership. Just because they complained about excessively easy monetary policy for eight years in a row and promised to return to what they mistakenly call orthodoxy upon getting power does not mean they will not go the exact opposite way. It took them one whole day to abandon their racist base who wanted them to stick it to
the Jews on Wall Street.
So I would keep an open mind on this, wait to see what these crazies actually say their plan is. They might end up tolerating/promoting a bit more inflation than I originally thought the Fed would.
If they do, I guess I ought not complain about it simply because the right policy is randomly delivered by the wrong guys. Of course, while I am sitting here taking my sweet time figuring this out, the markets will move. I don’t get paid to do this you know. It is a hobby and I should probably get a more active one.
* Not to be excluded is the possibility that Taylor and Feldstein might have a different take on monetary policy with a Republican in the White House.