Bahnsen and Pettit argue Fed never controlled inflation

David Bahnsen, Chief Investment Officer at The Bahnsen Group, and Drew Pettit, Chief Investment Strategist at Roundhill Investments, contend that the Federal Reserve never actually possessed control over inflation. In a discussion, the two analysts rejected the premise that the central bank has lost its grip on price stability, asserting instead that the capability was absent from the start.

Bahnsen noted that market sentiment regarding equities depends heavily on the belief that the Federal Reserve is managing inflation. He stated that while the market is currently comfortable with this expectation, long-term concerns arise if investors believe the central bank is moving in the wrong direction. Pettit agreed that the Fed is currently focused on securing the headline that inflation is under control. He argued that from a public accountability standpoint, Washington must make a claim and own that narrative, even if some factors are outside the Fed's purview.

The conversation traced the origins of current inflation to a misdiagnosis three to five years ago. Bahnsen pointed to several contributing factors, including a massive growth in the money supply and the spending binge following the pandemic. He also cited Federal Reserve policy, specifically the decision to hold rates at the zero bound for too long. However, he acknowledged that rates were also held at the zero bound from 2009 to 2020 without resulting in similar inflation levels. Bahnsen described the situation as multi-causal, noting that everyone seeks a single cause explanation when the reality is more nuanced.

Pettit highlighted additional structural changes during these time frames that have longer-lasting impacts. He observed that companies received free billions of dollars, beyond direct checks, because they were earning more on their cash reserves than they were paying out on their term debt. This dynamic, combined with other factors, contributed to an environment where inflation pressures were not fully managed by traditional monetary policy levers.