The official Federal Open Market Committee meetings are still a few weeks away, but Federal Reserve Chairman Jerome Powell hinted at what those meetings will confirm a month from now.
The Fed is determined to get the U.S. to a 2% annual inflation rate… and keep it there.
Since 2012, the Fed has been fighting deflation… or “negative inflation,” as some uninformed financial media pundits have taken to calling it. Since that time, the annual consumer inflation rate in the U.S. has been below the target 2% rate – an issue Powell and team are determined to remedy.
That central banks have been battling deflation isn’t news. Both the European Central Bank and the Bank of Japan are formally on record as promoting inflation via currency-supply increases… otherwise known as quantitative easing, QE, or “printing” money.
But what is news is the Fed is starting to hint at how it might try to increase inflation. Central to that theme is increasing the supply of money and credit to consumer credit markets. The idea here is pretty simple: If consumers have more money to spend, inflation should increase.
The question is how does the central bank (or banks in general) accomplish this objective?
But the Fed’s control over inflation isn’t as simple as increasing the currency supply. In order to get inflation, the money must flow into the right parts of the economy. So far in 2020, most of what we’ve seen out of the Fed has ended up inflating the Wall Street economy – boosting stock prices.
The Fed’s bond-buying and lending have ended up benefiting mostly Fortune 1000-sized companies. If you look at stock market performance as a guide, it has helped Apple, Facebook, Tesla, Alphabet (Google’s owner), and Zoom.
Things haven’t looked so good for Main Street so far. So we’ll likely see from the Fed a program oriented around lending to small businesses, most likely via Fed-backed loans that Fed-chartered banks will be more than happy to administer at the local level. Small businesses account for roughly half of the new jobs created in the U.S. each year.
Beyond that, look for the Fed to partner with Uncle Sam to offer low-interest consumer credit aimed at education (student loans) and transportation (cars). Both of these are key consumer spending areas that the Fed can influence with financial support.
Finally, investors should keep an eye on how the Fed measures core inflation. Jerome Powell dropped a not-so-subtle hint that one way the Fed will achieve a 2% core inflation rate is to ensure it measures inflation in a way that fully captures the Fed’s actions.
A cynic would say that means the Fed will measure inflation in such a way as to ensure we achieve 2% inflation. That’s not too dissimilar to the way the Chinese government and the People’s Bank of China measure economic growth – they set the target, then ensure the data supports that target!
In short, the era of Fed and government intervention isn’t over, not by a long shot. So investors shouldn’t be surprised to see the Fed activating lending programs that have never existed before, all as part of its plan to boost inflation.
Specifically, you can expect these programs to target the U.S. consumer and help our ability to spend.