Statements from the new Fed Chairman Powell indicate a hawkish stance to fight inflation, which is the first indication of its kind in a long time from the Fed. Interest rates had been held artificially low (at or near zero percent) over the previous seven years by Powell’s two predecessors, Ben Bernanke and Janet Yellen. This act in and of itself is tantamount to pushing inflation higher, but Bernanke and Yellen were desperately trying to avoid a 1930s style Depression.
Economic policies of the Trump administration are restricting immigration, which will drive up wages, and increasing government spending (reducing taxes), which will drive up demand. Trump is also fomenting tariffs, which will do two things: 1) drive up prices of goods in the US, and also increase scarcity. In addition, Gary Cohn, the Director of National Economic Policy for the Trump Administration, just resigned. This event creates additional instability and uncertainty surrounding future economic moves by the White House.
The February jobs report was unexpectedly strong, showing growth of 235,000 in private payrolls, versus the 195,000 expected. This makes the fourth month in a row exceeding 200,000 and provides the Fed with more rationale for raising interest rates. The downside risk of the economy showing this level of employment strength is the possibility of the Fed raising rate more than the already expected three or four times this year.
In the wake of these events and the current economic outlook, higher inflation seems the only rational conclusion.
Note: the 235,000 jobs stated above was from a CNBC report on March 7, 2018. The Bureau of Labor Statistics (BLS) February report released on March 9, 2018 showed a 313,000 non-farm payroll increase. (Blog updated March 10, 2018 @ 10:50am PST)