Uh-Oh, the Misery Index Is Rising. What That Says About Rates.

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Federal Reserve Chairman Jerome Powell at his confirmation hearing this week.

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Brendan Smilowski/AFP/Businesshala

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Now, in the winter of our discontent, it should come as no surprise that the Misery Index has made a comeback. People of a certain age will remember that this was a measure conceived in the 1960s by economist Arthur Okun, then an adviser to President Lyndon Johnson; This added unemployment to inflation. This sum will describe the economic woes facing most of us, whose concerns may be more general than the difficulty of finding a slip large enough for a new megayacht. Barring 0.1%, having a job and being able to pay bills ranks high on the worry list.

During the post-World War II era, the suffering index ranged from just less than three in July 1953, When inflation was negligible and the US was fully operational, June 22 was at the height of the impasse under President Jimmy Carter in 1980. The Misery index was in steady growth last year, having been pushed into double digits in April and stood at 10.9 by December. Not surprisingly, as the suffering progressed, the University of Michigan Consumer sentiment index begins to slide,

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The last time the Misery index hit double digits was in May 2012, when it stood at 10.4 with 8.1% unemployment during a slow recovery from the recession following the 2007–09 financial crisis. But then inflation eased to 2.3%, as was the case for most of the previous quarter-century.

That is, until last year. The misery index rose despite a steady decline in the unemployment rate and consumer sentiment fell to 3.9% in December. Inflation has proved more harsh than transitory, a term that Federal Reserve officials have used optimistically, and which has spelled misery for those paying higher prices.

And so inflation moved to the evening news and newspaper front pages last week, with the consumer price index rising 7% in December from a year earlier, the biggest year-on-year increase in four decades. The much-hyped kinks in supply chains are blamed as the Covid-19 pandemic persists.

But Joseph Carson, former chief economist at Alliance Bernstein, who has consistently voiced inflation, found that easy money fueled inflation as much as supply constraints and constraints.

They believe a lack of supply accounts for all the jump in prices of new and used vehicles, rental cars, home goods and appliances, apparel, sporting goods and food eaten away from home. All told, their figures, those items accounted for about 3.5 percentage points of the 7% increase in the CPI.

While the news trumpeted that this was the biggest annual increase in the CPI in nearly four decades, Carson points out that if the index is calculated with the formula used before 1982, it could be used to estimate home prices. prices are calculated. ‘ accommodation costs. According to the most recent S&P Core Logic Case-Shiller Composite Index, home prices were up 19% from a year ago. Charged rent – a measure in the CPI that estimates what homeowners would be willing to pay to rent out their homes – was up only 3.8%. Adjusting homeowners’ costs for actual prices would have added an additional 3.5 percentage points to a 7% increase in CPI.

Easy money contributed to this real jump in inflation, while the pandemic pushed up other prices, Carson argues. Somehow we suspect there are homes or condos on those container ships anchored off the West Coast that will ease a tight housing market.

What sets it apart from this hotbed of inflation in the past is the federal-funds rate, which was pegged at 13% in 1982 by Jim Reid, head of thematic research at Deutsche Bank. With the Fed now continuing its key policy rate of 0% to 0.25%, the real rate (after adjusting for inflation) is well below anything seen during the Great Inflation of the 1970s and only from the World War II era In comparison, he wrote in a client note. Deep negative real rates equate to super-easy money.

In his confirmation hearing before the Senate Banking Committee last week, Federal Reserve Chairman Jerome Powell reiterated the central bank’s intention to prevent current high inflation from adding to the economy.

But when asked by Sen. Pat Tomei (R., Penn.) how realistic it was to put inflation back on the Fed’s goals while maintaining negative real interest rates, Powell’s initial response was to blame those disruptions, Due to which the supply and demand decreased. He added that if the Fed continues to push inflation, it will use its tools and raise rates.

Meanwhile, the Fed’s policy remains too expansionary in the face of inflation that is making us sad. While much of this has been in rising commodity prices, high service costs can become a major problem, especially as the reduction in fares begins to feed into the CPI.

The consensus now among top Fed officials and market participants is that the liftoff for the fed-funds rate at the March 15-16 Federal Open Market Committee meeting with a 25-basis-point increase on Thursday is being given an 83% probability. according For the CME Fedwatch site, The odds favor additional 25-basis-point moves in June and September, with a fourth increase in December given better-at-the-money odds. Four increases would push the funds rate from 1% to 1.25%, which is still negative in real terms. (One basis point is 1/100 of a percentage point.)

While those increases are on the horizon, the Fed continues to purchase $40 billion worth of Treasury securities and $20 billion of agency mortgage-backed securities each month. Although the FOMC announced Another taping of its bond purchases At its December meeting, it is continuing to add liquidity by expanding its balance sheet, which is closing in on $9 trillion, up from about $4 trillion before the pandemic.

The latest inflation data should prompt the Fed to announce an end to its securities purchases at its January 25-26 meeting, Neil Dutta, head of economics at Renaissance Macro Research, wrote in an email. While property purchases are set to end by March, paving the way for the much-awaited first lift in rates, he said the end of the first would be a very small, flamboyant surprise for the market, which was anticipating the eventual runoff in the balance sheet. .

Dutta sees little chance of inflation moderating into the 2% region by the end of the year, as envisaged FOMC’s Summary of Latest Economic Estimates, “There’s a lot of inflation in the pipeline,” he says. He estimates that the total income is growing at the rate of about 10%. Therefore, it is hard to imagine a 2% inflation rate unless one assumes a real growth of 8%, he says.

To rein in inflation, the Fed’s monetary expansion would have to slow and eventually reverse. As central banks stop buying and begin redeeming mature securities, JPMorgan estimates the market will need to absorb an additional $350 billion in bonds this year. According to a report by Nikolaos Panigirtzoglu, head of the bank’s Global Quantitative and Derivatives Strategy Group, a slower growth in the money supply will result in less excess cash available in equities.

This prospect of tight liquidity is already giving a miserable start to 2022. This could be just the beginning.

Write Randall W. Forsyth at [email protected]

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