Inflation Expectations

Published on March 22, 2024

The Federal Reserve employs a large number of highly credentialed economists, but their predictions have left much to be desired in recent years.

Major policy errors led to an inflation spike that permanently eroded the value of the dollar. Disinflation, while certainly welcome, only reduces the rate of further erosion of purchasing power. Much of the discontent among voters in this election year has to do with the fact that most people expected price spikes to reverse when policymakers prattled on about inflation being “transitory.” If you doubt this, just talk to friends and family outside the world of finance and investing and see what they have to say.

Of course, those of us who follow these matters closely always knew that the Fed would never permit any sort of deflation. The value of the dollar only goes in one direction over time, just like rainwater rushing down a mountain. The only question is how steep the slide will be over long periods of time.

Inflation remains considerably higher than the Federal Reserve’s target of 2%, which is equivalent to halving the purchasing power of the dollar over thirty-five years.1 But much to the relief of traders, the Federal Open Market Committee’s statement after meeting this week was dovish, with the much scrutinized “dot plot” indicating that three cuts to the Fed Funds rate remain on the table for the second half of the year. 

There’s no shortage of publications that claim to be able to predict interest rates and inflation. It won’t help sell subscriptions, but I haven’t a clue about where the CPI or the Fed Funds rate will be in six months, one year, or even five years.

However, recent events have made it clear that the Fed’s 2% target is asymmetrical.

Policy errors that lead to massive spikes in inflation will never result in the Fed seeking to bring inflation below 2% for any length of time. Instead, the Fed will try to gradually bring down inflation back to 2%. It is obvious that this will lead to an average inflation rate above 2% in the long run, probably far above 2%. In addition to the Fed’s clear inflationary bias, politicians of both parties appear comfortable with deficits as far as the eyes can see which will lead to debt as a percentage of GDP rising in the decades to come. The inflation tax is easier to raise than any other type of tax.

There is no good reason for readers to care about my views on inflation.

I am just another voice expressing concerns about the Fed’s policy objectives. However, I think that readers should pay attention to Warren Buffett. As I’ve discussed many times in recent years, Berkshire Hathaway avoids investing in bonds, and its minuscule exposure has tilted toward very short duration securities. Warren Buffett might not often comment on macroeconomics explicitly, but his actions show that he is not at all tempted by current rates on long term bonds relative to inflation.

In September, I wrote a three-part series examining Warren Buffett’s views on inflation based on his writing and statements over many decades. These articles were for paid subscribers. My policy is to make paid articles free for all readers after six months, so all three articles are now available for everyone to read in full:

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Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.

Inflation Expectations
  1. In fact, the Federal Reserve does NOT have a mandate to destroy 2% of the value of the dollar annually. The text of the 1978 Humphrey-Hawkins Act includes the following text indicating a goal of achieving zero percent inflation (stable prices) by 1988, provided that this could be done consistent with the reduction of unemployment: “Upon achievement of the 3 per centum goal specified in subsection (b) (2), each succeeding Economic Report shall have the goal of achieving by 1988 a rate of inflation of zero per centum: Provided, That policies and programs for reducing the rate of inflation shall be designed so as not to impede achievement of the goals and timetables specified in clause (1) of this subsection for the reduction of unemployment.” [Emphasis added]. Also see: https://rationalwalk.com/death-taxes-and-inflation/ [↩]
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