Forward Guidance’s Danny Dayan says the Federal Reserve has effectively eased policy by just standing still. Markets priced in future cuts and consumers spent more - the household savings rate plummeted. Dayan calls this 'passive easing' and argues it’s fueling the largest inflation impulse in 15 years, outside of 2021.
His proprietary models show money supply (M2) grew at an 11% annualized rate in February. Bank loan growth hit 12%, the fastest in 15 years. Dayan contends the Fed’s neutral rate estimate is broken; it’s likely 4.5%, not 3%. With rates at 5.5%, policy is only mildly restrictive, which explains why interest-sensitive sectors like housing are already waking up.
“Every day they don't hike, they are effectively easing into an overheating market.”
- Danny Dayan, Forward Guidance
The Fed’s rigid 2% inflation target compounds the problem. On What Bitcoin Did, Allen Farrington argues that target is a historical accident, originating from a New Zealand finance minister’s throwaway comment during a 1980s TV interview. It was never scientific. Sacha Meyers adds that central banks enforce positive inflation to prevent the real value of massive nominal debts, like mortgages, from crushing the economy.
Jack Mallers sees the inflationary wave arriving via energy. With the Strait of Hormuz handling 20% of global oil supply, Brent crude at $120 reprices every consumable. US gas prices are up 33% year-to-date, nearing 2022 highs. Mallers argues this is a 1970s-style 'second wave' of inflation, now baked in.
“Everything in life is a commercialization of the sun's energy. Money is simply an abstracted form of human time and effort used to buy that energy.”
- Jack Mallers, The Jack Mallers Show
The consensus across the podcasts is that current policy is trapped. The Fed is easing into inflation to avoid a recession it cannot afford, given a $2 trillion annual deficit and a $40 trillion debt pile. Dayan expects a parabolic melt-up in risk assets until the Fed is forced to slam on the brakes. The only exit, according to Meyers and Mallers, is a bottom-up monetary reset - but the system will drink more to avoid the hangover until it collapses.
