The Fed needs to deflate assets

Something interesting struck me listening to JPow speak all this last week. Which is that he can’t actually control the biggest causes of inflation (energy and food supply shock) But he can control equities, housing and the labor market. Which says to me, those are the only levers he has, so he has to use them.

We all know inflation is really high and it’s the Fed’s job to fix that. But there are multiple components to inflation, some of it is food and energy, which is very volatile and also hard for the Fed to control. And a big part of it is housing, which the Fed does have control over, through rates and MBS purchases.

An obvious way for JPow to bring down headline inflation is to simply correct the housing market, to make up for the increased inflation in commodities and energy that he can’t control.

Jobs and equities aren’t directly part of the inflation calculation although they obviously have a huge effect on what people can afford.

He can’t control food and energy inflation.

At the last meeting, he said repeatedly that they are unable to control food and energy inflation.

What you’re seeing is the situation getting more difficult and you look around the world and I mean lots of countries are, lots of countries are looking at inflation of 10 percent and it’s largely due to commodities prices.
But all over the world you’re seeing these affects. And so, and we’re seeing them here. Gas prices
are, all-time highs and things like that, that’s not something we can do something about.

Which is a tough position to be in. He can’t control a major factor in the inflation number that is his job to control. So what can he do? What anyone does when balancing a budget – cut in other places. Can’t pay your rent? Cancel your cable and gym membership.

So what’s the fed’s equivalent? Jobs, equities and housing.

But he can control housing

Jobs demand will go down (and people will likely lose jobs) but people still need energy and food, so it’s hard to solve the supply chain crisis that way.

Equities are already in free fall but that isn’t helping inflation, either.

That leaves housing. So an obvious way for Jpow to bring down headline inflation is to simply correct the housing market, to make up for the increased inflation in commodities and energy, that he can’t control.

But people need housing too! Does this mean people will lose their houses? Not necessarily en masse – a lot of housing was bought by non-primary owners, people who bough second, vacation and investment homes. Those could all go on the market without people losing the homes they live in. Especially when it appears likely that those properties are not going to provide an investment return.

Those who lose their jobs might lose their homes and this is very unfortunate. The Fed doesn’t have a lot of ways out of their predicament right now – but this is one huge elephant in the room. They have no mandate to protect housing – like they do with jobs. This is their way out.

Disclaimer: I’m an idiot first time home buyer. I’ve never taken an econ class in my life. I’m just sharing what I see and learn as it happens. I am 100% certain I will get things wrong, so don’t take any of this as the golden truth.

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