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Everyone surely knows by now that it's the Fed's job to bring inflation down. That's one of their three mandates πŸ‘‡

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.

But politicians keep interfering, in some cases even actively working against the central bank while they try to do their job.

Politicians have different interests to central bankers. Things like re-election, midterms and generally trying to ensure people don’t hate them any more than they already do.

Which is why senators are starting to talk out of both sides of the mouths with regards to rate hikes. Say you're against more hikes before the negative effects are really felt, and the job losses are hitting. Essentially, they’re trying to disassociate themselves from the outcomes while still ensuring they're still on record for telling the Fed to get inflation down.

It's politics 101. Unfortunately, we’re bound to see more of this as we head towards the midterms in a couple of weeks time.

Full-time social justice shouty person (and occasional US senator) Elizabeth Warren was the first to lay into the Fed after their September rate hike... πŸ‘‡

It's to be expected...

But yesterday, someone in a far more influential (and knowledgeable) position called on the Fed to slow down... πŸ‘‡

Yep. The Chair of the Senate Banking Committee. The full letter's here, and this is the key snippet πŸ‘‡

Monetary policy tools take time to reduce inflation by constraining demand until supply catches up – time that working-class families don’t have.
As J.P. Morgan Asset Management chief global strategist David Kelly noted, β€œin the long history of Federal Reserve mistakes, one general error stands out. They tend to wait too long and then do too much.”
We must avoid having our short-term advances and strong labor market overwhelmed by the consequences of aggressive monetary actions to decrease inflation, especially when the Fed’s actions do not address its main drivers.
For working Americans who already feel the crush of inflation, job losses will make it much worse. We can’t risk the livelihoods of millions of Americans who can’t afford it.
I ask that you don’t forget your responsibility to promote maximum employment and that the decisions you make at the next FOMC meeting reflect your commitment to the dual mandate.

The critique does have some merit. Policy works with long and variable lags and raising interest rates won't address the core issues on the supply side of the global economy.

That doesn't change the fact that inflation is entrenched, broad-based throughout the economy and way beyond any reasonable interpretation of 'it's all supply constraints'.

The longer it takes to bring down, the more it will figure in economic decisions such as wage negotiations, and the longer it will persist.

Deutsche Bank were so fed up with economists and their terrible inflation forecasts that they went back through history to see how things usually play out. It's not hopeful... πŸ‘‡

β€œLooking at this full history, the evidence shows that once inflation spikes above 8%, median inflation takes around 2 years to even fall beneath 6%, before settling around that level out to 5 years after the initial 8% shock.”

So, the Fed should keep going. They'll likely claim that the consequences of not bringing inflation under control will be far worse for the populace over the longer-term.

Politicians don't care about the longer-term. They just want to be liked enough to be elected.

It's nothing new. We've been here before πŸ‘‡

A Case Of History Repeating
All eyes are on Powell for Jackson Hole. Will they go 50 or 75? So EXCITING! Except there’s a far bigger game unfolding...
"They would tell each other, we're not going to let inflation get out of hand this time. And then the unemployment rate would rise, and all that would get forgotten because the political pressures would grow."
"The whole climate of opinion was against them"

This Fed seems to be aware of these risks. Back in March, Powell was grilled by Senator Shelby and asked if he would do whatever was necessary, just as Volcker did 40 years ago πŸ‘‡

User Clip: Shelby/Powell exchange
Fed Chair Jay Powell is asked about the Volcker example.

At the time, he said that he would. But will the Fed give in to political pressure all the same?

Will they even get the choice to slow down? An ever-increasing number of economists are coming around to the idea that inflation will be with us for some time yet.

The Age of Inflation
Easy Money, Hard Choices

Regardless, markets seem intent on trading the mythical pivot, and if the data goes their way on Friday, combined with any semi-dovish comments from the Fed and buyback flows could be enough to extend the risk rally.

More on that from us here πŸ‘‡

The state of the world: And the markets
Investors should beware tales of an imminent death of inflation and dovish pivot from central banks. Read more