(an email exchange)

>
>   Warren,
>
>   Claims just printed before I finished this….351 (down from revised 375) But Con’t Claims
>   made a new local high @ 2831……….the water coming into the boat, is still coming in at
>   a fast rate than the water getting bailed out………..Con’t Claims going higher is
>   bad………as the FED already knows…..
>
>   Best
>   Please call with any questions
>   RMG
>
>

Hi Rob,

Problem for the Fed-

With inflation both where it is and where it’s going over the next few quarters due to price pressures already baked in, it now NEEDS a larger output gap to keep it under control as per it’s own models.

And as crude/food/import prices go even higher, the required output gap grows.

The question is where the curves cross. At some point even the pessimistic output gap projection isn’t sufficient to bring down inflation.

The mainstream view (not mine) is that higher food/crude takes away demand for other products. And it’s the lack of demand for these other products that keeps high food/crude a relative value story and not an inflation story, and inflation expectations remain anchored.

If, at this point, if the Fed adds to demand- becomes accommodative- the result is inflation. , ,

At least up to now, the fed has seen risk of a collapse large enough to bring on an output gap large enough to not only bring inflation down, but drive us into a 30’s style deflation.

The main channel for this to happen is the housing channel.

They see a potential drop in housing prices to drive us down into a widespread deflationary spiral.

Now, with inflation rising as fast as it is, what I’m saying is they are getting closer to NEEDING a housing collapse just to both bring inflation into their comfort zone over a multi year horizon, and to keep inflation expectations from elevating near term.

Any sign of a bottom or even a near bottom in home prices could now mean they’ve overdone it on the easing, as even a 6% unemployment rate might not be a sufficiently large output gap for their models to show the declines in inflation they need, and we are far from that. .

warren