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Fed Can’t Reach 2% Inflation Without Crushing Economy, El-Erian Says
It's my sense -- or perhaps it's only a hope -- the Fed will unofficially tolerate a VERY long runway towards reaching their 2% goal. (And, if that goal proves to be an elusive target they can eventually de-emphasize the importance of reaching it.) Why would a 3% to 4% inflation rate be a big problem anyway?
“Everyone lives in their own little world”. My old man told me that a hundred times. When I was a young man inflation was very, very good to us. We had no kids and lived very simply. We had a couple rentals that were appreciating and rents were going up. We took off for Mexico on our boat and easily lived on the high money market interest. Inflation was very very good to us indeed. I bet there are plenty of seniors today with piles of cash who are watching their income soar as Powell stays anchored to his 2% goal. “Everyone lives in their own little world.”
Yes @LarryB - For us boomers there was a bright side in the past round of inflation. Homes / real estate appreciated a lot. Depended on the mortgage rate of course. But with a fixed-rate mortgage, even at higher rates than today, some of us made out pretty well in the 70s & 80s. The labor scene, however, was a lot different. Two important changes: (1) The ability of unions to negotiate wage increases that keep even with inflation has diminished since those days. (2) Automation continues to take away many lower-skilled jobs. Fully automated car-washes with no workers on site is just one further sign of the trend. One wonders what unskilled / low skilled workers will eat?
My inquisitive mind wonders what investments might do well with much higher than the Fed’s targeted 2% inflation? Honestly I don’t know. But your reference to rising rent is intriguing.
All through the rate-rising process, I've seen more than twice that office REITS are a thing to stay away from. But if your investing time horizon is from 2 to 66 years? Maybe this is just the right moment?
@Hank. The past round of inflation had its moments but everyone’s circumstances were different and often changed. After two years living in Mexico we returned to the states. I found myself the sales manager of the car dealership. Flooring, the interest paid on the inventory, was 2% over prime as it was called then. And the cars were not selling. At that point we were paying more interest on each sold car than the profit we made if one did sell. So inflation was very, very bad to me.
I also agree that if the Fed were to make a straight dash for 2% the economy would really tank. I'm hoping that they will talk 2% but actually settle for maybe 3 or 3.5% and declare victory. The bright side of that for the Fed is that it stores up more gunpowder to use in the next cycle of recession. They aren't stupid... not by a long shot.
@LarryB - interesting. I do recall interest on inventory being hard on dealers. Quite a contrast to today’s low inventories. In 1970 I walked away with a new Plymouth Fury for $2800. The dealership near Detroit was loaded with them all at that price. You even had your pick of 2 or 3 different colors.
Re the topic under discussion. I’m worried they’re going too far. Sure hope @Old_Joe is right about the Fed. Add to the “soft”, “hard” and “no landing” discussion the possibility of a double-landing. That would be what appears to be a gentle landing and recovery at first, but followed by a hard thump.
I try not to allow this kind of speculation affect my investing decisions. Suppose it has to to some extent.
"When Volcker left office in August 1987, inflation was still running at 4%, far from zero, but far below the 13% of 1979 when he had arrived as Fed Chairman. Real GDP growth was strong; fed funds were 6.6%."
I don't know what inflation rate Paul Volker was aiming for. The Federal Reserve has targeted 2% inflation (not explicitly at first) since at least 1996. Several other central banks have also adopted a 2% inflation target. The interesting history of how this came to be is noted in the article below. Link
When I was looking to buy my first house, mortgage rates were 16%. Folks who had 6% mortgages were in clover. Banks were offering them CASH to refinance at higher rates. A guy in my department said his bank told him he HAD to refinance. I bought using a land contract at 11%, not realizing the risks. (I can also remember when gas was 25.9, and a Lotus Europa was $7,000.)
"Folks who had 6% mortgages were in clover. Banks were offering them CASH to refinance at higher rates. A guy in my department said his bank told him he HAD to refinance." First I heard of this. Was the bank Wells Fargo ?
Comments
Yup. Gotta know when you're the crane operator; when and how to stop that swinging wrecking ball.
Housing jobs appear heading for Clift now
My inquisitive mind wonders what investments might do well with much higher than the Fed’s targeted 2% inflation? Honestly I don’t know. But your reference to rising rent is intriguing.
Re the topic under discussion. I’m worried they’re going too far. Sure hope @Old_Joe is right about the Fed. Add to the “soft”, “hard” and “no landing” discussion the possibility of a double-landing. That would be what appears to be a gentle landing and recovery at first, but followed by a hard thump.
I try not to allow this kind of speculation affect my investing decisions. Suppose it has to to some extent.
@hank- last of the big spenders! In 1970 we bought our very first new car- a Plymouth Valiant, for an even $2000. It was blue.
The Federal Reserve has targeted 2% inflation (not explicitly at first) since at least 1996.
Several other central banks have also adopted a 2% inflation target.
The interesting history of how this came to be is noted in the article below.
Link
Image / Funny - that $2,800 car brand new now sells for $19,900 used. Damn. Should have held on to it.
practicalcheap type. And you're right.https://twitter.com/paulkrugman/status/1626938001191313408
Folks who had 6% mortgages were in clover. Banks were offering them CASH to refinance at higher rates. A guy in my department said his bank told him he HAD to refinance.
I bought using a land contract at 11%, not realizing the risks.
(I can also remember when gas was 25.9, and a Lotus Europa was $7,000.)
First I heard of this. Was the bank Wells Fargo ?