IMF Chief Warns of “Sustained” Rise in US Inflation

Even with the CPI rising more than expected every month this year, Federal Reserve Chairman Jerome Powell continues to insist that inflation is “transitory.” But not everybody is buying Powell’s narrative. In a blog post published July 7, International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned of a “sustained” inflation rise in the United States.

But even if she’s right, will the Fed do anything about it?

There is a risk of a more sustained rise in inflation or inflation expectations, which could potentially require an earlier-than-expected tightening of US monetary policy,” Georgieva wrote.

During the June FOMC meeting, the Fed raised its CPI projection to 3.4%. That was a full percentage point higher than the March forecast, but the central bank continued to categorize inflation as “transitory.”

“Our expectation is these high inflation readings now will abate,” Powell said during his post-meeting press conference.

The numbers seem to tell a different story.  The CPI in January was up 0.3%. It was up 0.4% in February. It rose 0.6% in March, 0.8%. in April and 0.6% in May. If you add up the inflation increases through the first five months of 2021, it comes to 2.7%. If you annualized the number through the end of the year, the inflation rate would be around 6.5%.

Peter Schiff has said all along that this rising price trend isn’t “transitory.”

Every month they expect less inflation, and they get more inflation. Yet all of these people, who are so surprised every time we get an inflation number that’s much higher than they thought, they’re still clinging to the false notion that inflation is transitory. Well, the fact that they’re wrong every month — they’re just wrong in total. All the inflation is going to keep beating their expectations, including the fact that it’s transitory. Because the inflation that we’re experiencing is anything but transitory. it is only going to get worse.”

Georgieva worries that more persistent inflation will force the Fed to start raising rates and rolling back its quantitative easing, leading to a “sharp tightening” of financial conditions around the world and “significant capital outflows” from emerging and developing economies.

“It would pose major challenges especially to countries with large external financing needs or elevated debt levels,” she wrote.

But will the Fed actually tighten? Schiff doesn’t think so. He believes the central bank will stick to its “transitory” inflation narrative as long as possible because it can’t tighten without wrecking the economic recovery.

Those who have figured out that inflation isn’t transitory still haven’t figured out that the Fed will do nothing to contain it. If the Fed could actually fight inflation it would already be doing so. It’s because it can’t that it’s pretending sustained inflation is transitory,” Schiff said in a tweet. “The markets are bracing for the wrong outcome. Investors expect the economy to slow as the Fed pumps the brakes to successfully fight off inflation. In reality, the Fed will step harder on the gas even as inflation accelerates to prevent the economy from stalling into recession.”

The fact is the US economy can’t handle the high interest rate environment necessary to tame rising prices. The Federal Reserve boosted interest rates modestly to 2.5% in 2018 and all hell broke loose. The stock market crashed, and the Fed was forced back to loose monetary policy even before the coronavirus pandemic. As Schiff noted in a podcast, if the economy couldn’t handle higher rates in 2018, it certainly can’t handle them today.

The level of debt is so much greater than it was then. And so, the more debt you have, the lower interest rate is required to be able to service that debt. So, if two-and-a-half percent was too much when the national debt was significantly lower than it is today, then that threshold is much lower. I don’t even think we could survive a move to one percent from the Fed.”

And the longer the Fed waits to act, the harder it becomes to act.

The longer the Fed waits to taper its asset purchases, the harder it gets to taper. That’s because the longer the Fed waits the larger its balance sheet grows and the higher the national debt rises. The larger the debt, the more the Treasury depends on the Fed to finance it.”