This Time is Different


by Chris Black


With core inflation still twice as high as the Fed’s 2% targe, perhaps the relaxed sense of dovishness coming out of the last FOMCdeserves some scrutiny and historical perspective.

According to a recent report from BoA’s Jared Woodard who heads the bank’s Research Investment Committee, the “Fed’s cuts next year could reignite structural inflationary forces” (which we warned of earlier this month as there are multiple “parts of the economy proving robust, even impervious, to rate hikes: record government deficits; high household savings, rising wages & record home prices; corporates cushioned by private credit and cash.”

In this post we will reiterate some key points from the full report :

“We wonder whether higher prices have become embedded in the economy (i.e. whether inflation is persistent) and if only outright deflation will push them back to the long-term trend (see Exhibit 11).”

High government deficits have probably offset much of the tightening that Fed hikes were expected to bring. Even in one of the strongest labor markets on record, Congress seems to be spending as if we are in a deep recession:

“Government ‘dry powder’ abounds but productive spending avenues are limited… 77% of federal funds authorized in legislation like the $2tn the CHIPS Act (, IIJA (, and ESSER ( has not been spent yet. Actual spending is expected to rise over the next decade assuming no changes in legislation (Exhibit 15).”

Fed hikes do not stop Congress.

Most of the stimulus authorized in the past three years has yet to be spent and capacity utilization in the economy is already at decade-highs:

“High government spending is fine when there’s slack in the economy, but US capacity utilization is at 80% today, near decade highs (Exhibit 16). Tight capacity limits the amount of productive spending that can be absorbed by private markets.”

As much as Powell wants to be Paul Volcker (, who famously crushed inflation in the early 80’s (, it may turn out that he be remembered more like Arthur Burns (

“Prices are unlikely to return to pre-Covid levels. It would probably take a historically painful recession to engineer that degree of deflation. And the Fed would lean hard against such an outcome because it targets inflation, not price levels. In other words, past inflation is mostly water under the bridge for the Fed.” — BoA

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