The Federal Open Market Committee (FOMC) released its latest statement on monetary policy on Wednesday, June 16, 2021. As was widely expected, the Federal Reserve will keep its target federal funds rate near zero, in spite of higher price inflation.
Jerome Powell held a news conference at the conclusion of the meeting and statement release. It was amazingly boring, even though he had to answer questions about price inflation coming in a bit higher than expected.
Powell is still saying that the higher inflation should be transitory, but admits that it is a difficult job trying to predict the future. He, like many others, also blames shortages.
But shortages and inflation go hand-in-hand. If there are shortages, then prices should eventually rise. The shortages themselves may be due to higher demand for certain things, which in itself is a result of loose monetary policy.
The cure for shortages is higher prices. The cure for higher prices is higher prices, as the higher profit motive gives an incentive to producers and suppliers to produce more and supply more. Higher prices also give an incentive for consumers to cut back.
The problem is if the higher prices are a result of higher costs for producers and suppliers, and if there is an overall trend of higher prices in the economy. This can only come about and be sustained by more monetary inflation, courtesy of the central bank.
In other words, the Fed is the problem. There are shortages and higher price inflation because of the Fed. It is possible to have a shortage of something due to other factors, but when you hear about it being widespread, all fingers should point to monetary policy.
The idea of shortages doesn’t make much sense in a somewhat free market system where prices are allowed to fluctuate. But there can certainly be temporary shortages because the market needs time to adjust.
Some businesses are hesitant, and rightly so, to raise prices quickly. Even if their costs have risen, they don’t know if it is a temporary situation. Gas stations get away with it because we know to expect fluctuating prices. But it is not as easy in other businesses.
Imagine you are a store selling electronics. There is supposedly a chip shortage. You are selling a certain type of computer for $500. Your costs to make or purchase the computer wholesale are $400. Your costs all of a sudden rise to $500, but you don’t know if it is temporary. You may just hold off on raising the price until you find out if the higher costs are permanent. When the cost of obtaining a product is the same as your sell price, you are really losing money, as you carry all of the other costs associated with holding the product and running your store.
If the higher costs are coming in for everything, then you will have to quickly raise your prices unless you are willing to run at a significant loss for a while.
At the same time, it is understandable to not want to raise prices too quickly. There is no guarantee that your customers will pay the higher price. A sale at $500 is better than no sale at $600.
Also, most companies are not like gas stations where the price changes every day. It is complicated to keep changing the price of something. It gets more complicated if you sell hundreds or thousands of products.
Imagine walking into Best Buy and seeing a computer for $499. You go home and talk to your spouse. The next day you go back to buy it and the price has gone up to $539. Then you go back the next day and the price is at $524. This just isn’t how most retailers want to operate, and rightly so. Customers want some predictability.
This is also a reason that you will never see anything truly priced in Bitcoin. If a company ever says they accept Bitcoin in payment, it will always be a conversion from the true price in actual money.
Since most companies are hesitant to constantly change their prices, it is possible that prices could rise even more rapidly in the coming months. It is impossible to say, but many companies may have held off raising prices significantly up to this point. If they see the shortages continuing, which in most cases is really just higher prices, then they may decide it is going to be more permanent.
The Fed’s Balance Sheet
This all goes back to the Fed’s balance sheet. As it approaches the $8 trillion mark, the Fed is not letting up.
Powell said that this is the meeting where they are talking about talking about tapering. That is not an error. In other words, they are still in the very preliminary stages of even thinking about slowing down its policy of mass monetary inflation.
As of now, the Fed will keep adding about $120 billion per month to its balance sheet.
When they talk about “tapering”, that doesn’t mean stopping the asset purchases (monetary inflation) all at once. It means slowing it down.
So even when the Fed begins tapering, whenever that will be, it will still be adding money to the balance sheet. Maybe it will slow down from $120 billion per month to $80 billion per month, but new money will be created until it has completely stopped.
After the Fed’s announcement on Wednesday, stocks fell. They somewhat recovered during Powell’s press conference.
It is not exactly clear why. Investors knew what was coming. There wasn’t anything earth shattering in this statement or in the press conference.
Is it only because Powell is now saying that they are talking about talking about tapering that stocks sold off? If that’s the case, imagine when the Fed actually starts tapering.
Stock investors love the loose monetary policy. It keeps their game going. Higher price inflation is a threat to that because it threatens that the Fed will stop creating so much money out of thin air. The Fed may want higher price inflation, but Powell and company don’t want anything close to hyperinflation.
There may be something of a tug-of-war coming between higher price inflation and recession. My fear is that they will both win.