I enjoyed the Emanuel Balarie audio interview (first link). He is predicting a Fed funds rate of 6-6.25%, and I cannot for the life of me figure out why Bill Fleckenstein keeps saying the Fed will pause. He’s been wrong for months, and I think he’ll be wrong again.
The reasons given by Balarie for 6% Fed funds rate: Ben is data dependent, and inflation keeps rising. The economy is slowing because consumers overspent, so raising rates won’t make it much worse for the consumer but it WILL keep inflation from rising more. Ben’s biggest concern is inflation, not the slowing economy.
I side with Balarie on this one. Ben said in his Senate testimony that the economy is doing well because the Fed has credibility, because it has reduced inflation expectations. It is the expectation of inflation that causes inflation. If a company gets a higher price input and believes it is temporary, it will not pass along that price increase. But if it believe it is permanent, it will raise prices; next, workers demand higher wages, and the cycle starts.
This psychological factor in the markets (EXPECTATIONS of inflation cause inflation) explains why he sent his Fed governors around the country talking up their inflation concerns. He wants us all to know the Fed is concerned about inflation and will act to contain it.
Ben said that price stability is the Fed’s prime mission. So he must keep raising interest rates until he has data to prove that prices are stable.
In his testimony, he explained he does not rely on CPI, but on many other data points as well. So we can’t think he is fooled by the massaging of CPI numbers, since that is only one of the many inputs he considers.
I still don’t get why some people say the Fed will pause. What is their reasoning?
