Stagflation is very rare — a stagnating economy is incompatible with rising inflation. For inflation to rise we must have rising incomes to pull prices up.
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We’re not saying when we’re going higher because we don’t know, but mark your calendars for June 13, 2018 for the day the Fed flipped from stimulus to leaning against the economy. Powell’s second signal: “The U.S. economy is in great shape.”
The big show is Wednesday, the Fed. It will increase the overnight cost of money from 1.75 percent to 2.00 percent, taking “prime” to 5.00 percent for the first time since 2008. The big question for housing: will long-term rates also rise 0.25 percent, putting mortgages astride 5.00 percent?
Although the Fed will not accelerate its pace of tightening now, that withheld action is predicated on the expectation that the current pace of tightening will by next year slow the economy to a sustainable pace, GDP growing sub-two, monthly payroll gains below 100,000.
There is something new underway in the employment economy, coinciding with the IT revolution and global trade, and it is impossible to evaluate the Fed’s risk of a very bad shot from the blind side.