Does the Fed have any idea how the real world works?

2% isn’t realistic.

 

 

I think most of us in the business community already know the answer to this but to make it more clear, NO, the fed folks apparently don’t understand how people in the real world work.  We have underqualified federal reserve leadership who lack some basic understanding of how people operate.

 

Seriously folks.  The economy is too hot. Employment is too strong.  Does a coach ever tell a runner the morning of the Olympic final, you ran too fast in the prelims. You need to slow it down.  Don’t win by such a large margin. Hey, don’t even win at all.  That’s not what we run the race for.  Again, the answer is no.  The goal is to run the fastest you can and win.  There is no other goal.

 

The stated goal of 2% inflation is not realistic. Here is why.  Inflation ran low (there was even talk of deflation. Anyone remember that?) because interest rates were low.  Interest rates were low because the economy blew a gasket.  Then housing prices went bonkers as everyone freaked out post pandemic and moved and overpaid because rates were low and the payments worked.  Housing makes up a large part of the inflation metrics and this (along with price increases everywhere else) pushed up the inflation numbers. 

 

Not good.  This created a large affordability gap between earnings and the cost of housing, primarily.  The real issue is this gap, not really inflation.  The goal should be close the gap. This can happen by bringing down housing prices or bringing up wages or some combination.  The problem is that housing prices will remain sticky due to the low mortgage rates in 90% of these loans, the cost of land and new builds and the unwillingness of sellers to take a loss.  So, the only real solution is for wages to rise. 

 

For wages to rise, we need unemployment to remain low. This will keep pressure on wages pushing them up, inflating the wage base to meet the new housing cost base.  So, we don’t need 2% inflation. And we definitely do not need high unemployment. 

 

High unemployment will simply serve to hold wages down.  Low wages will drag home prices a bit but not really enough to close the gap.  A strong economy drives transactions.  A bad economy ices transactions.

 

Now, if you have really high unemployment, then people can’t make the mortgage payments, houses get turned back to the lender because there are no buyers at a price where it makes sense for the seller to not give it back to the lender. Then, you have 2008 all over again.

 

So, stop trying to get inflation to a ridiculous number and let’s shoot for stability.  Get the rates down a couple of points and let’s give it 2 or 3 years and things will get back into balance. Stability, stability, stability.

 

We need fed leadership focused on stability instead of 2% inflation at all costs. 2% inflation with a broken economy isn’t worth it.