Jason Thomas on Fed Policy, Inflation, and Economic Realities

Inflation and the Fed's Target

• 🎯 The Federal Reserve has not hit its inflation target in 54 months, a duration longer than the lifespan of many children born since the target was last met.
• 📈 Excess inflation is occurring on top of an already significant 20% increase in the consumer price level, making current inflation levels particularly concerning.
• 🗣️ There's a tendency to trivialized excess inflation, often by focusing on rounding errors or minor fluctuations, which overlooks the sustained price increases.

Driving Factors of Inflation

• 🚫 Tariffs are not the primary driver of current inflation, as services unaffected by tariffs continue to rise at a significant annualized rate.
• 📊 The "super core" inflation, which the Fed closely monitors, remains elevated at 3.3%, indicating persistent price pressures.
• ⚠️ Policy shifts, including tariffs and broader immigration policies, are creating negative supply shocks that could accommodate price increases and upward wage pressure.

Economic Outlook and Fed Actions

• 📉 The idea that the Fed should be cutting rates aggressively, especially amidst a large concentrated capex boom, is considered inapt.
• ⏳ The Fed should take time to digest economic data and allow the economy to find a new equilibrium rather than rushing into rate cuts.
• 💡 Aggressive rate cuts made too soon could lead to an unwanted upward move in yields, negating the intended effect and potentially mirroring past market reactions.

Future Fed Objectives

• ⚖️ Beyond inflation and maximum employment, there may be a third objective for the Fed: stabilizing public finances.
• 📉 Lowering interest rates paid on national debt could become a reason to keep rates lower, potentially influencing future policy decisions.
• 📊 Current market expectations for rates to fall to 3% by year-end are inconsistent with the observed capex boom and current unemployment levels near the Fed's target.

Tariffs and Presidential Authority

• 🏛️ The President possesses broad statutory authorities to impose tariffs, with mechanisms like the 1962 and 1974 Trade Acts allowing for their continuation.
• 🔄 Even if certain tariff acts are deemed inapplicable, the President can utilize other avenues and mechanisms to maintain trade restrictions.