Road To Retirement: The Fed Is Gaslighting Investors

For the first nine months of this year, Fed President Jerome Powell advanced the narrative that inflation was "transitory." Powell conveniently never defined transitory. By using open-ended language, he could attempt to counter the public's concern that once inflation takes hold, it's hard to get rid of. Moreover, the Fed does not have a good history of predicting inflation, and it knows this. Thus, to confidently say it's transitory was a stretch.

Then, at the end of September, Powell said current inflation was "frustrating" and he blamed it on problems with the supply chain. And he said he sees those things resolving. Well, he must see something that most leaders of S&P 500 companies don't see. In earnings report after earnings report, companies are highlighting problems with the supply chain. Business leaders don't clearly understand what's happening and can't accurately assess when they'll be fixed. By saying he sees them resolving, Powell is creating a perception of a solution that doesn't reflect what business leaders are experiencing on the ground.

Then, in October, with inflation more clearly entrenched, Powell said the most likely scenario was that inflation moves back to "trend" as the supply chain issues sort themselves out. Yet, he offers no workable timeframe or evidence for how the supply chain issues will disappear. The reality is the Fed has little insight into what's ailing the supply chain and the coincident labor shortage issues. There is no doubt that what is happening is unusual and unprecedented. But don't expect the Fed to admit that. The Fed must appear as if it is all knowing and all seeing. Gaslighting helps accomplish that goal.

Then, we have the mother of all inflation disconnects, which is what's going on in the housing market. As you may know, the formula used to calculate housing inflation in the CPI is quite convoluted. According to this formula, housing inflation over the last year is running at about 3%. Yet, anyone who has recently tried to buy a house or rent an apartment knows that housing inflation is probably above 10%. Given this disconnect, you'd think the Fed might say, "Gosh, our housing inflation numbers may not be capturing what's happening." But you don't hear that.

The point of highlighting these issues is to help investors understand that the Fed has an agenda. And when powerful people have an agenda, don't expect them to highlight the multiple ways they could be wrong. The Fed's current agenda is that inflation isn't a problem, and it will vanish soon. But consumers are seeing sizeable inflation everywhere: autos, houses, rent, gas, utilities, food, insurance, travel, health care and the list goes on. To keep investors calm, the Fed resists acknowledging what we are all seeing.

The challenge for the Fed is that expectations can have consequences. For example, if we all expect that there will be a shortage of chicken wings this weekend, it's likely there will be as we all run out to stock up on wings. So, if investors expect inflation will run higher for longer, we'll start doing things to actually create that inflation. Thus, in the Fed's mind, it is gaslighting for the common good. It helps achieve its policy objectives.

I hope the Fed is right about inflation and that within the next four to six months it significantly subsides. If that happens, the gaslighting will be seen as a prudent technique to calm the masses long enough for the solution to arrive. But if they Fed is wrong, it is faced with some interesting choices.

If the Fed can keep the stock market going up and our homes appreciating, maybe we'll all accept more inflation. This would be a way of moving the goalposts. Four percent inflation isn't bad if your 401(k) is going up 12% a year.

But if the Fed must kill the bull market and tank home prices to get control of inflation, folks won't be too happy with the Fed. Some will argue the Fed created the bubble, sucked investors into it, and then crushed their retirement dreams. That's not a great narrative for the Fed or for the politicians in control when it happens.

If the Fed is faced with those prospects, expect the Fed to come to the markets with new potential solutions. And our political leaders will encourage it. When chaos strikes, it's interesting how just about everybody rallies around a bailout. Even if inflation doesn't subside, there may be a way to keep the party going.

Charlie Farrell is a partner, managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.