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Chairman Powell: Fine Tuning and Price Stability

"A remarkable consensus has developed among modern central bankers ... that there's a new 'red line' for policy: a 2 percent rate of increase in some carefully designed consumer price index is acceptable, even desirable, and at the same time provides a limit. I puzzle at the rationale. A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification."

Paul Volcker

April 27, 2021 | There is a growing awareness on Main Street that inflation is a problem. Everybody knows about the run-away markets for financial assets and single-family homes. It seems that the stocks with the least substance are likely to benefit the most in the current interest rate environment. But vendors and suppliers are starting to raise prices in the face of scarcity in supply chains, the precursor to a significant increase in inflation.

The growing gap in valuations between different stocks is starting to drive a feeding frenzy, from SPACs to plain old M&A. Sometimes liquidity crazed buyers are taking out higher valued stocks. Witness the spectacle of New York Community Bank (NYSE:NYCB), trading 10% below book value, taking out Flagstar Bancorp (NYSE:FBC) at a substantial premium over book.

And as our friend and fishing buddy Ed Pinto at AEI has long warned, the combination of low interest rates and easy credit from lenders is killing affordability and creating future credit losses for the Treasury. Just in time,