Expect the Fed to address rising inflationary expectations

Although inflationary expectations are running hotter than expected, the Fed has the available tools to engineer normalcy in a post-COVID environment. Over the next year, I expect inflationary expectations to once again move lower than UST yields.
Commodity prices (Dow Jones Commodity Index, right axis) ran hotter than expected, and the USD (UUP, left axis) fell, as Fed policy encouraged inflationary expectations to rise versus bond UST yields. Look for Fed policy to unwind these distortions. This should be dollar supportive.

-Inflationary expectations are running hotter than previously theorized. The marketplace is now looking to the Fed to begin taking action.
-Supply chain disruptions have been partially caused by the unanticipated heightened macroeconomic demand. The Fed will have to work to discourage this sharp rebound in demand as the global economy returns to some sort of normalcy.
-Some of this excess demand has been generated as economic participants have been hoarding in anticipation of scarcity and future higher prices.
-The Fed still has a lot of tools available at their disposal. Do not underestimate this ability.
-The Fed’s massive bond purchases (currently $120 bil/mo) have facilitated the drops in UST yields versus inflation data. Bond yields cannot continue to remain lower than comparable inflationary points.
-The fact that bond yields have remained lower than inflation demonstrates the power and efficacy of Fed policy. Do not underestimate this power when the Fed begins to taper and tighten monetary policy.
-Inflationary fears have diminished over the past week as market participants expect the Fed to eventually act. Recent FOMC minutes intimate sooner-than-expected action.
-I predict an initial tapering of MBS purchases of at least $20 bil/month. This would decrease overall monthly purchases to $100 billion. Look for a further unwind to $80 billion in UST only.
-Fed funds futures indicate a rise to .25% soon (.26%).
-While there is always anticipatory price volatility in front of future Fed action, my experience over the decades indicated that asset price volatility remains heightened, even after the Fed has already begun to tighten.
-Over the next couple years, we may once again be confronted with an overly tight Fed (e.g. during late 2018).

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10 thoughts on “Expect the Fed to address rising inflationary expectations

  1. This article is from The Atlantic regarding the housing market. It’s the perfect whitewash article for the plebes.

    https://www.theatlantic.com/ideas/archive/2021/05/us-housing-market-records/619029/

    I know just from anecdotal evidence that 75 to 80% of the US population has no idea about monetary nor fiscal policies. They know nothing about the US Fed, and they have no idea how open borders has utterly destroyed the supply-demand dynamic in residential housing, especially in the bottom and middle thirds. But you and I do, and so when we read this article we see that it is such an incomplete piece of garbage. But this is what the rank-and-file of society reads, and so it modifies the vast majority of the unwashed.

    If the Federal Reserve continues these types of policies, you can guarantee that house prices can rise another 20% without any additional increases in median household incomes. At a price-to- household income multiple of 3 1/2, two years ago, and 4 at the end of last year, it is probably about 4 1/2 now.

    Now that the massive waves of deficit spending are geared toward the domestic economy and domestic consumer, I will predict that the price-to-income multiple over the next two to three years will reach 5. This will begin to close the gap between what was once very inexpensive United States housing and the rest of the former Commonwealth. But I guess by then, the former Commonwealth real estate will rise in lockstep.

    Once again, the plebes will never figure it out. They will blame us investors as the scourge of humanity.

  2. Chris, do you think the stock market could experience a slow bleed? Almost all of the recent crashes have been rapid with major volatility spikes. This pattern seems a bit too obvious right now.

    I think a slow bleed would confuse investors the most. It would be similar to the dot com collapse, only much slower. People hedged with volatility or put options would suffer badly.

    I look at stocks liked AMD or ARKK, which are in bear markets but never really experienced dramatic increases in implied volatility. These stocks are actually trading at extraordinarily low volatility right now and during the collapse. The sell-offs were just continuous but not particularly sharp. I think if the market followed this pattern, it would cause the most pain.

    1. No. Find it virtually impossible that the stock market could experience a slow bleed right now. There’s just way too much deficit spending, and with low interest rates in the mix as well as extremely and massively dovish monetary policy, all of this new money is finding its way assets all kinds. My only concern about this latest deficit spending over previous types of deficit spending is that it is domestically oriented. This is why we are seeing rising inflation of the magnitude we are observing.

      In the past, the great preponderance of deficit spending was geared to offshoring the dollar to some extent. By offshoring, the monetary inflation was effectively sterilized. We are seeing the domestic tilt of this monetary printing in full action. Just take a look at the prices of real estate. This is why I knew over a year ago when the monetary policies and fiscal policies were contemplated in the wake of covid, that real estate prices and assets all around this nation would move higher regardless of circumstances.

      Despite what the novices will claim, a dollar in military spending is not the same as a dollar in domestic spending.

      The only way that we will see a slow bleed in the stock market is if the Federal Reserve decides to pull the plug. But like I said previously, I doubt the FED funds rate can get above 1 to 1.5 percent. If the Fed raises to 1%, I believe the markets will begin to crack, and if the markets begin to crack and we do see this proverbial crash, the Fed will just start buying equities. We’ve been contemplating on this blog for years that the FED would eventually buy every asset available. Investors would actually prefer this as it would maintain asset values. Of course, our adversary, which owns the FED, would gradually buy up the world in the process.

      While the stock markets are overbought when viewed through weekly and monthly charts, and is due for a correction, that doesn’t mean there’s going to be a crash. The only way we’ll see a crash is if they decide to pull back fiscal and monetary policy. That’s not going to happen anymore; the plebs demand their piece of the pie.

      If the dollar goes down for the dirt nap here and continues to fall versus the other major currencies, this would just ensure rising dollarized asset prices. I contemplated a couple years ago a Dow 40,000 scenario. The Dow was in the low 20,000s at the time, and viewed Dow 30,000 as a fait accompli. To be honest, it’s happening faster than I had contemplated, but it is moving in the general direction. I also mentioned that price to household income multiples for residential real estate would continue to rise, and if this is the case, housing prices could easily rise another 20% with no rise in household income. As long as interest rates stay low, this type of increase can happen over the next couple years.

    2. And the highly speculative plays that attracted many of the younger traders, like AMD, AARK, EV, solar, lithium, etc., are supported by the massive waves of deficit spending and monetary printing. The fact that many of these firms, which will never make money, have levitated to the levels we have seen, is testament to this massive wave fiscal spending and monetary printing. This is why we don’t see volatility yet as we would normally assume.

      The world is awash in cash and we see the problems of the reverse repo windows as evidence of this excess cash. All of this excess cash is traveling the world, and bidding up asset prices of all sorts, including your stock portfolio and primary residence.

  3. The announcement by the Biden regime regarding the upcoming fiscal budget is a huge booster to asset prices and the wealth consolidation process. Of course, this massive wave of deficit spending will be defended as being useful for the poor and working-class. As you and I have always been saying, deficit spending and social largesse are really designed to consolidate the global wealth.

    “Documents obtained by The New York Times show that Mr. Biden’s first budget request as president calls for the federal government to spend $6 trillion in the 2022 fiscal year, and for total spending to rise to $8.2 trillion by 2031. The growth is driven by Mr. Biden’s two-part agenda to upgrade the nation’s infrastructure and substantially expand the social safety net, contained in his American Jobs Plan and American Families Plan, along with other planned increases in discretionary spending.

    The proposal shows the sweep of Mr. Biden’s ambitions to wield government power to help more Americans attain the comforts of a middle-class life and to lift U.S. industry to better compete globally in an economy the administration believes will be dominated by a race to reduce energy emissions and combat climate change.”

    https://www.nytimes.com/2021/05/27/business/biden-plan.html

    The bigger the deficit spending, a smaller the size of the working class. I know that real estate will continue moving up higher and higher. The working class will be destroyed by the very people who claim to be looking out for the working class. The politicians that the blacks and Hispanics vote for all the politicians that actually do the most harm to their financial lives. Asset owners need this ignorance to continue so they can continue making money.

    1. My local Headstart program has received over $20 million in grants . A big boost in a year time frame thanks to the Covid hoax. That is just my town, not counting all the other cities in the USA. Big money is coming in and spread around in the local areas like never before. Food Pantries are overstocked, Snap benefits and all the dole programs are in play. More people are relying on this welfare system, so we can see how the mark beast agenda can actually become a reality.

      AMC is going nuts. Short squeeze apparently, but I thought it would fizzle out by now. Who or what is pumping this stock, at this price it’s not 50-100 share buys from robin hooders and wallstreet betters like the media states…If you bought today congrats!

  4. Here is a good article from today’s Barron’s titled, “What if the Fed Can’t Raise Interest Rates? Why Near-Zero Is the New Normal.”

    https://www.barrons.com/articles/what-if-the-fed-cant-raise-interest-rates-why-near-zero-is-the-new-normal-51622063791

    The economist being interviewed brought up that in the next stock market crash the Fed may just buy equities. We talked about all this, but so far, the Fed is buying up everyone’s mortgages.

    Monetary policy that seemed so many to be incredulous 5-10 years ago is now accepted as normal.

    In 2018, the Fed couldn’t even raise the Fed funds rate up to 2.5% before the markets began to cave. This time around I see that as being half that before the Fed will have to loosen again in the next cycle.

    This is great news for those who own the assets. The more assets, the better. I have to admit that I am impressed how the Fed has averted negative rates so far. But that means it had to purchase more than $100b/mo. If the Fed didn’t buy this amount, it would to have resorted to NIRP.

  5. The logic is amazing, and this debating style is prevalent in a dumbed-down society. Take a look at this article about how the author claims that electrification of vehicles helps minorities.

    https://www.marketwatch.com/story/electric-cars-are-about-environmental-justice-for-black-and-hispanic-americans-11621872198

    I actually can’t think of a worse automotive trend that will punish the minorities and the poor than through EV . This will drive total ownership costs up through the roof for the average user, yet the proponents of the New World Order will argue that not to do so is racist.

    In a morally and cognitively compromised society, the powers-that-be can argue in any way they choose to promote their agenda for the New World Order. Vehicle electrification is nothing but a tracking and tracing mechanism, and Fed policy is nothing but the establishment of exploitative policies designed to subjugate the working class and the poor.

  6. Three fed members came out yesterday and reiterated the dovish stance that the Fed has been taken in the wake of covid. They say they would be surprised if prices rise higher, but it would be temporary. I actually agree on the temporary thing, since quantitative easing, by function, is at least disinflationary.

    The ones who ultimately pay the price are the bottom 90%. The bottom 90% own no sizable amounts of income generating assets and thus become the price takers. Those who own these assets in many regards become the price makers. The price makers have techniques to offset higher inflation. The one aspect of government policy that is deleterious to minorities is the high inflation rates we have been experiencing. The minorities and the poor are being crushed, yet the government and fed says they are looking out for them.

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