Gerstner reports the Fed expects 2% negative real rates by year-end, with 4.3% inflation and 2.3% ten-year rate.
“They said we expect inflation exiting the year to be 4.3 and we expect the ten year to be around 2.3.”
Gerstner argues used car prices jumped from $20,000 to $29,000 due to stimulus.
“The price for a used car was $20,000 for ten years. And then just coincidentally, alright, they give us a bunch of Red Bull and the price goes to $29,000.”
Gerstner notes inflation falling despite massive government spending from chips act and infrastructure bills.
“And this is remember, we're seeing inflation roll over huge, and we have a chips act and an infrastructure we have massive government spending going on, and we still see inflation rolling over.”
Gerstner says cargo container costs increased tenfold by June 2021 when inflation was evident.
“June 2021, when the world knew inflation was here. I mean, the cost of a cargo container had gone up by 10 x.”
Gerstner says Kashkari wrongly forecast no rate hikes until 2024 in June 2021 when cargo container costs had risen 10x.
“June 2021, when the world knew inflation was here. I mean, the cost of a cargo container had gone up by 10 x. Okay? He says we're not gonna have rate hikes until 2024.”
Gerstner argues the Fed made a knowable mistake ignoring 20x shipping cost increases in summer 2021.
“The cost of a container from China to The US had gone up 20x. Okay. The idea that we didn't have an inflation problem in the summer of twenty twenty one”
Gerstner cites Fed forecast of 1.5% GDP, two to three rate cuts, and 2% inflation next year.
“But if you look at the Fed's own forecast for next year, one and a half percent GDP, two to three rate cuts, ending the year with a two two handle on inflation.”
Gerstner says the Fed made a clear mistake in summer 2021 by not seeing inflation coming.
“But by the summer of twenty one, when the Fed was saying they don't see inflation, that was clearly a mistake.”
Gerstner explains falling inflation increases economic restrictiveness, requiring rate cuts to maintain same restrictiveness level.
“every month that inflation goes down, the effective restrictiveness of the economy goes up, holding all else equal. So you gotta take rates down just to keep it at the same level of restrictiveness.”
Gerstner observes import prices rising slower than domestic goods, opposite of expected tariff impact.
“Import prices have been going up at a slower rate than domestically produced goods. Okay, so this is the exact opposite of what you would have expected from tariffs.”