On Tuesday, the Atlanta Fed cut its GDP estimate for the first quarter of 2022 to zero.
Just a few days ago, the estimate was for 0.6% growth. That was down from 1.3% just a few days before that.
This is not an encouraging trend.
Keep in mind, Atlanta Fed GDP estimates tend to start high and then fall as the quarter progresses. We’re still early in the quarter.
Just a few weeks ago, a collapse in economic growth seemed impossible. We’re coming off 7% GDP growth in Q4, capping off the fastest growth year on record.
But here we are.
Stagflation is defined as little to no economic growth coupled with high inflation.
And here we are.
This puts the Federal Reserve in a nasty spot. The central bank would typically respond to an economic contraction with rate cuts and quantitative easing. But the Fed is supposed to be tightening monetary policy to deal with surging inflation.
What is a central banker to do?
Odds are, the Fed will back off tightening or abandon it completely. It may even have to ramp up QE again. That’s the fork the Fed knows. When the economy is collapsing, you loosen up money. It seems likely the central bankers will follow the script and ignore inflation.
The markets seem to think this is the likely path. They have already priced out two of the projected 2022 rate hikes.
So, inflation will continue to spiral upward as the Fed throws more gasoline on the inflationary fire.
ZeroHedge said the central bank is about to lose control.
“While it can explain away a dovish pivot with the coming recession, nobody has any idea how the central bank will offset the coming commodity (hyper)inflation which has already sent many commodity prices to record highs, and many more to come.”
Peter Schiff said the Russian invasion of Ukraine creates the perfect scapegoat for inflation.
“It’s going to be an excuse to allow rising inflation. Just like they claimed it was transitory because of supply chain bottlenecks, well, now they can pull that transitory card out again. Only this time it’s because of Russia. The supply chain problems are now because of Russia and the Ukraine. It has nothing to do with the Fed. It’s got nothing to do with monetary policy. In fact, the Fed needs a more expansionary monetary policy to counteract the damage being done to the economy.”
In terms of an inflation fight, Schiff was saying the Fed can’t do what it’s claiming it will do long before the situation heated up in Ukraine. Now the Fed is backed even tighter into the corner. It can’t simultaneously pump up the economy and fight inflation. Odds are, it won’t be able to do either.