#fedfundsrate

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

Has the Federal Reserve (the “Fed”) caused the burst in inflation over the past year? Not Likely.

While the Fed can influence money supply (M1) growth, they can’t control how fast it is spent. Money velocity measures how many times a dollar of money supply circulates. If M1 growth rises but it is saved (a decrease in velocity), GDP and prices will stagnate. In the 1970’s (circle) both M1 and velocity rose, causing rapid inflation. Contrast that to today, where the Fed caused an historic expansion in M1 to counter the pandemic/recession. But until recently, inflation was quiet as households and businesses hoarded cash and velocity plummeted. The supply chain wreck caused by the pandemic have been the major factors in elevating inflation, not “excessive” M1 growth.

But this speaks of the Fed’s policy impact on inflation. If/when velocity rises as Covid subsides and lockdowns end, economic activity is likely to rise, lifting velocity, and that may frustrate the Fed’s attempts to control inflation. It would largely be out of their hands at that point.

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By:  Thomas Steffanci, PhD, Senior Portfolio Manager

Is the real unemployment rate 2.3%? If you back out people who quit voluntarily to look for better paying jobs, the answer is yes. Quitters are still “employed”. They are in transition to other employment opportunities and should be considered as part of the labor force. If you adjust the current unemployment rate of 4.8% for the 2.5% “quit rate” (highest in 20 years) the “real” unemployment rate is 2.3%. This belies the Federal Reserve’s continuing easy monetary policy because of a weak labor market.  If it is actually “tight” it adds to the case that inflation is likely to be more persistent and higher, prompting earlier increases in the Federal funds rate than the market now expects.

*Note – blog post corrected corrected 10/22/2021.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.