Consider this chart and other news today:
- The Fed’s Barr said “there could be two economies right now, with the higher incomes doing well and the lower incomes struggling.”
- Delta Airlines citing same and nothing, premium class revenue will soon flow through coach
- Stock markets continue to rise (making the wealth effect worse)
The reason – to me – is obvious. That’s because baby boomers are retiring and continuing to spend.
From the Fed’s perspective, this is a major problem as the two mandates may now be in conflict. Previously, as employment fell, inflation also fell because spending dried up. Looking ahead, we may see unemployment rise, but spending will remain strong (or even increase overall). This would create real problems for the Fed when it tries to decide what to do. What will happen is they will keep rates lower than they need to be, continuing to inflate assets and increase wealth. In many ways, this situation has been underway for some time, but policymakers (and the market in general) have failed to recognize it.
