Huge government spending is undermining the Fed's inflation battle, markets guru Larry McDonald warns
Fox Business
- Massive government spending is fueling inflation, according to markets guru Larry McDonald.
- "Washington is stepping on the gas and the brakes at the same time," he said Thursday.
- McDonald’s warning comes with the Federal Reserve’s chosen inflation gauge still running clear of its 2% target.
Huge government spending is likely undermining the Federal Reserve's ongoing fight against inflation, according to markets guru Larry McDonald.
"Let's 'fight inflation' with government spending up 10-15% year over year, a trending $1.7 trillion federal deficit for 2023," the Bear Traps Report founder said on X Thursday. (The Congressional Budget Office expects the US's debt pile to rise by around $1.4 trillion this year).
"No one is calling them out… Washington is stepping on the gas (colossal deficit spending) and the brakes (epic rate hikes) at the same time," McDonald added.
The Fed has lifted borrowing costs from near-zero to over 5% over the past year-and-a-half – and inflation has started to rapidly cool in 2023 as a result of that tightening campaign.
But its favored Personal Consumption Expenditures inflation gauge rose 4.2% in July, meaning that prices are still rising at a rate far above the central bank's 2% target.
McDonald blamed stubborn inflation on the White House's high spending levels – although other prominent economists have praised the Biden administration's economic track record, with the US managing to dodge a long-predicted recession and unemployment holding steady at under 4%.
Inflation has also fallen much faster in the US under Biden than in other parts of the West, including both the Eurozone and the UK.
"A while back, some economists were using higher US inflation to argue that Bidenomics, especially the American Rescue Plan, was the major culprit in inflation," Nobel laureate Paul Krugman said in July, referring to the 2021 COVID-19 stimulus packages.
"But now the upper hand is on the other foot: America now stands out as having been much more successful than other major economies in bringing inflation down, even though employment growth has remained strong," he added.
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