Jim Grant: The Fed Cannot Control Inflation

The Fed is under the misconception that it controls events, according to James Grant. It is overconfident in its belief it can accurately calibrate and attain a 2% inflation target.

Grant spoke via a webcast sponsored by State Street SPDR ETFs. The title of his talk was, “Inflation and Interest Rates: Impact on the Market and Gold.” Grant is the founder and editor of Grant’s Interest Rate Observer.

He mused that inflation is a “state of mind” based on the interaction of monetary policy and the real economy. But he was emphatic that inflation is a genuine threat for U.S. investors. There is a “gale” of inflation of “all kinds” in progress, he said.

Inflation is “clear and present and will manifest itself in our everyday lives,” Grant said, unlike the past 12 years of low inflation and even deflation.

“It will catch the Fed backfooted,” Grant said. In response, the Fed will “prevaricate” and make excuses.

Part of the Fed’s difficulty is because inflation is difficult to measure, according to Grant. Consider the toothbrush in its legacy and electric forms. How do you adjust for the clear quality improvement of electric toothbrushes? The hedonics used by the government to measure inflation are “inexact and not really a science,” he said.

Can the Fed arrest rising inflation? The Fed wants to retain control of the markets, he said. It has intervened to promote smooth market functioning after sudden, down equity markets. It will act if inflation rises. The economy can tolerate only 2.5% real rates, according to Grant. If that is breached, the Fed will resort to yield-curve control or even selling bonds (which will drive yields higher).

Central banks, including the Fed, are highly manipulative in their actions and intentions. They want us to know that they are there for us in times of difficulty, he said. That attitude has engendered a level of confidence among investors that is reflected in the level of margin debt, cryptocurrency activity, excessive multiples of revenue and earnings for stocks, and negative-yielding bonds.