Jim Grant: It's too early for the Fed to declare "mission accomplished"
By Mike Maharrey
At its December meeting, the Federal Reserve effectively declared victory over inflation. They didn't didn't use those words, but that was the signal given by the policy trajectory laid out by the FOMC.
Is this victory dance premature?
Financial analyst Jim Grant thinks so.
In an interview on Bloomberg Markets: The Close with Romaine Bostick, Grant said it's way too early for the Fed to say "mission accomplished."
According to the Fed's "dot plot" showing the expected trajectory of interest rates. The central bank has penciled in three rate cuts for 2024 with another four cuts in 2025. That would lower rates to between 2 and 2.5 percent.
Federal Reserve Chairman Jerome Powell tried to temper this projection, emphasizing that inflation remains too high.
Powell was talking, but the markets weren't listening. As Bostick put it, they were all in on "mission accomplished."
Grant disagreed with the notion that inflation is beat saying it is "endemic." In other words, regularly occurring.
Grant pointed out that the federal government is running massive budget deficits even with unemployment at 3.7 percent.
Bostick asked Grant why he thinks the Fed even felt the need to communicate rate cuts at this stage in the inflation fight. Grant said that if he could "read the mind of the composite Federal Reserve," he thinks he would "impute this great insight."
Artificially low interest rates incentivize borrowing and debt. This blows up economic bubbles. When the central bank tries to normalize rates, these bubbles inevitably pop. This cycle is no exception. We're already seeing signs of distress in the economy with more corporate bankruptcies in 2023 than the pandemic year.
Grant said officials at the Fed are likely cognizant of this fact even if they would never say it out loud.
Grant called inflation an "arbitrarily imposed tax," and he said the new stance taken by the Fed, whether explicit or implicit, is basically "imposing a tax on the possibility of a sustained policy of much higher inflation than they had promised us."
Grant went on to call the Fed's 2 percent target a "dubious proposition."
Milton Friedman said inflation is always and everywhere a monetary phenomenon. Grant said he would call it "always and everywhere a moral phenomenon."
Grant said he thinks Jerome Powell and other members of the Federal Reserve look in the mirror and see themselves as Captain Chesley Burnett "Sully" Sullenberger who landed a crippled U.S. Airways jet on the Hudson River.
Grant said he has proved to the readers of Grant's Interest Rate Observer he can't successfully predict the future no matter how hard he tries.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.