August Personal Consumption Expenditures (PCE) inflation rose to 4.3% y-o-y, the largest gain in 30 years. The S&P CoreLogic National Composite Home Price Index posted a 19.7% y-o-y gain in July – the strongest housing inflation in data back to 1987. Zumper data show national apartment (two-bedroom) rent inflated 13.1% y-o-y, with Zillow national rental prices rising 11.5%. The Bloomberg Commodities Index ended the week with a year-over-year rise of 44.6%. A benchmark United Nations food index inflated 33% over the past year. University of Michigan consumer one-year inflation expectations were down slightly from July’s high to 4.6%, near a 13-year high – and only 0.5% below 40-year highs. Forecasts have September y-o-y consumer price inflation (CPI) at 5.3%, near the high since 1990.
We’ll begin with a Chair Powell comment from his September 22nd press conference:
“If you look at the last two or three years before the pandemic hit, you saw, after a lot of long progress, you saw a really strong labor market. And you saw wages at the low end moving up faster than everywhere else. Something that’s great to see. We also saw the lowest unemployment rates for minorities… We saw a really, really healthy set of dynamics. And, by the way, we also — there was no reason why it couldn’t continue. There were no imbalances in the economy, and then along came the pandemic. We were not, there was nothing in the economy that looked like a buildup of imbalances that could cause a recession. So, I was very much thinking that the country would really benefit from a few more years of this. It would have been — so we’re all quite eager to get back to that.”
This is somewhat confounding. If there were “no imbalances in the economy,” why then did the Fed resume QE in September 2019 – months ahead of the pandemic (with markets near all-time highs and unemployment at 50-year lows)? Federal Reserve Assets have ballooned $4.678 TN over the past two years (107 weeks), of which about $200 billion occurred prior to the Fed’s March 2020 crisis ramp up.
There were clearly worsening fragilities in market structure. It’s a key analytical point that the return of QE was in response to market “imbalances” – most notably instability in the “repo” market, which had clear potential to erupt as a catalyst to prick U.S. and global Bubbles. Recall also that U.S. “repo” market disorder followed on the heels of Chinese money market instability. Reenergized U.S., Chinese and global Bubbles could not have been more vulnerable heading into the pandemic. Their near implosions unleashed global monetary stimulus without precedent. (more…)