E-piphany

This is a single issue, of the May 2023 Quarterly Inflation Outlook.

The QIO is a 15-20 page quarterly discussion of current topics in inflation, including underlying dynamics, valuation, and related markets.

Executive Summary

• We do not believe there is a widespread banking crisis. SVB and other failures were the result of simple mistakes most banks don’t make and most regulators would have prevented.
• Our opinion of the Fed and Chairman Powell is being rehabilitated.
• The Fed funds rate is now at the mode seen during the 1990-2008 period, which seems approximately appropriate.
• The Fed continues to shrink the balance sheet even though they have ceased increasing rates. This is the right move and shows they understand that the balance sheet’s size is a problem, not a solution.
• We agree the Fed funds rate will stay around 5.25% for an extended period of time, and endorse that decision.
• The case for mean reversion on inflation is surprisingly weak.
• Declining money supply and rapidly rebounding velocity are wild dynamics that should be watched carefully!
• There are only small signs yet that the wage/price feedback loop has been arrested.
• De-dollarization is not a meaningful threat to occur in the next decade or two, and if it happened it would damage our economic adversaries more than it would damage the US.
• We increase our forecast for 2023 median inflation, while nudging down 2024 slightly. Policy has been greatly improved although it is too early to say that inflation will get back to target before 2025.