Wimpy, the always hungry character in the Popeye comic strip must have had great connections with the financiers on Wall Street or the Federal Reserve. His strategy of asking to get fed today, but paying for it in the future has been a brilliant strategy as prices of goods and services continue to increase at rate not seen since the 1970s. If Wimpy has been eating Big Macs from McDonalds, he could pay today for three Big Macs consumed in the 1980s with money that would only buy one today.
What Wimpy figured out long ago is that in a world of inflation, money is better spent today rather than tomorrow, when its purchasing power is lower. Of course he was going one step further, consuming today and paying the consumption back with “cheaper” dollars later. Either way, in a world of inflation, consumption and borrowing are encouraged, whereas saving is discouraged.
In its attempt to no turn all of us into a Wimpy, the Federal Reserve has been increasing the cost of money leading to higher interest rates across maturities, but with short term rates higher than long term rates. The challenge the Federal Reserve is currently facing is deciding whether current rates have been sufficiently high for a sufficiently long period of time to “de-Wimpify” the economy.
In the first couple of months of the year, the Federal Reserve tried to explain away persistent inflation as “seasonal”, probably because it had already used “transitory” too much and too prematurely as post-lockdown inflation was rearing its ugly head. Of course, not wanting to declare that it has been behind the eight ball in taming inflation, the Fed focuses on “inflation expectations” rather than actual inflation. Its key point is that “inflation expectations remain anchored”. Not to break it to the Fed, but actual consumers must pay for goods and services for prices posted, not for prices that would have been once expectations are normalized. While inflation may be “down” from the high levels experienced in mid-2022, now even inflation expectations have jumped and have only recently fallen back to 3%, a numbers still well above the Fed’s inflation target of 2%. Keep reading in attachment...