I am getting a lot of questions about why the Fed Hawks seem so intent & even panicked about inflation & raising rates NOW. The answer is multifaceted but ultimately lands on Fed credibility and the fear of repeating mistakes of the past. Inflation has been elevated for more than five years. Many shocks got us here, some would have been look-through events for the Fed in another world. That is harder now. We have seen repeated supply and demand shocks that have cumulated & at normalizing inflation. There is pushback but not enough to derail it thus far and the recent inflation data suggest it isn’t over. Supply & demand shocks have repeatedly collided to leave us with the longest bout of inflation since the 1970s, a particularly ugly decade. The cure was two brutal and scarring back-to-back recessions in 1980 and 1981-82. We don’t have the same level of inflation now but it is persistent. The longer the Fed waits to derail it, the more it could cost us - literally - over time. Worse yet, supply shocks - which are abundant and keep coming - are harder to derail than demand shocks alone. That was the lesson of the 1970s, as were the perils of a cental bank that lost its inflation-fighting credibility. The push to move now is rooted in a concern that waiting makes the economic costs of inflation & derailing it much more consequential. We are already seeing the stress of inflation show up along with a return of term premium in bond yields. Indeed, long-term bond yields are higher today than they were prior to Fed rate CUTS in 2024. Federal deficits are blowing up, fueling inflation & the supply of debt that must be issued. That is stoking concerns about our credit worthiness as a country. Now overlay surge in debt globally since pandemic, esp among developed economies. That supply is coming to market at the same time massive debt to fuel data center construction is being issued. Same time appetite for funding debt is waning. Another layer is the loss of the global reach of Gulf country sovereign wealth funds, which need to turn more inward in response to the conflict in the Middle East. All of those shifts are pushing long-term yields up, despite earlier Fed cuts. The upward pressure on rates could be greater if the Fed waits too long to deal with inflation than we are enduring. The warning hawks are giving is that waiting means more aggressive and destabilizing rate hikes, whether the Fed or the bond market does the job for them down the road. This is not the 1970s, but it rhymes. That is something to internalize. The Fed as an institution likes to learn, not repeat mistakes. That does not preclude new mistakes. No one knows when the rubicon of previous mistakes will be crossed or we have a worse mess due to market forces taking over. I would prefer we avoid both. I am looking at the PCE calculations & they are sticky & hot. 🥵 Too many have already been burned by inflation. That is prior to additional shocks just beginning to show up via the costs of AI. I say this personally & perhaps because I know the voyage. Inflation is like cancer - if it is allowed to metastasize, the cure and chance of survival go down. I caught my cancers early & have thus far been lucky. What we are seeing in the inflation data are worrisome. I don’t want the cure to cause more pain than needed. That is what I am hearing in the warnings of Fed hawks. Do a little today to stop it or risk worse outcomes later on. I am worried the cure might already be painful but risk management is telling me it is better to take that pain & reverse if the economy cools, than allow the bond market to do the job for the Fed. That is a brute force ugly overkill situation worth avoiding if at all possible.