(Fortune) - Good morning. Lots of news on the inflation and interest rate front yesterday. The consumer price report showed prices up only 5% over the past year.
Meanwhile, minutes of the Fed’s meeting last month suggested central bankers are prepared to raise the Fed funds rate again in May to a range of 5 to 5.25%. That could mark the end of an extraordinary 13-year period of negative “real” rates—with a Fed funds rate lower than the rate of inflation. The era of free money may finally be ending.
Monetary “doves” will quickly point out that what matters is not inflation in the last 12 months but inflation in the next 12 months, and there’s a possibility that tighter credit conditions in the wake of the banking crisis will cause inflation to drop. Hawks, on the other hand, will point out that “core” inflation—minus volatile food and energy prices—actually rose 5.6% over the year, and the unemployment rate remains at a stunningly low 3.5%, which will continue to put upward pressure on wages.
I’ve argued here that history offers little reason to believe inflation can be tamed with real interest rates at zero or below. Perhaps this time is different. But if it is, it may only be because the banking crisis has given the Fed an assist, pushing the economy into recession.
Either way, the outcome is the same: expect the next 12 months to be a tough time for the U.S. economy. A correction to an era of unprecedented fiscal and monetary policy is due.
More news below. And read why Warren Buffett dumped his holdings in Taiwan Semiconductor Manufacturing (TSMC) here.
By Alan Murray, Jackson Fordyce
