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All eyes on the Fed and inflation – Are we setting up for a broad pullback?

Cory
June 14, 2021

Ed Moya, Senior Market Analyst at OANDA joins us to look ahead to the Fed meeting this week and the possibility of any form of hawkish comments. If the Fed started talking hawkish we discuss what that could do for the markets, bonds, and commodities. This also ties into the inflation discussion that is ongoing and the word transitory that is the focus moving forward.

Click here to visit the OANDA website and keep up to date with Ed’s daily note.

Discussion
12 Comments
    BDC
    Jun 14, 2021 14:46 AM
    Jun 14, 2021 14:15 AM

    Please explain the “inflation…transitory…”.
    Is this to do with transitioning one way or the other?

      Jun 14, 2021 14:19 AM

      Sorry, I did a web search and got my answer.
      …”Fed officials have described the current period of high inflation as transitory, meaning it should be brief or short-lived. They have expected several months of elevated price increases because of pent-up demand and supply chain lags”

        Jun 14, 2021 14:29 AM

        The Fed is boxed: They can’t raise rates to stop inflation without bankrupting the Gov due to the excessive debt. Raising rates could cause a debt default. However, they allowed it to happen. The term “transitory” means they are waffling without a solution.

          Jun 14, 2021 14:37 PM

          Bingo David. From all the indications we are seeing across multiple sectors from lumber, to base metals, to energy & oil, to food & soft commodities, to semiconductors, to services, the inflation we are seeing doesn’t look that transitory. Sure there may a slight reduction month over month as this last reading was a hotter CPI reading than most were expecting, but that won’t be the justification for the FED to state it was just transitory.

          The harsh reality is that they need a little inflation (remember their 2% goal they had for a long time), to keep things from deflating, but once the inflation genie is let out of the bottle, it is much harder to get it back in. If the interest rates rise to fast, it will cause a debt implosion (as you mentioned above) but they are also being pressured to ease up on their accommodative $120 Billion a month in bond purchases (which is what is keeping rates as low as they are). If they start to taper, and rates increase, not only will the debt become unmanageable, but it would likely pressure the general markets and put a wet blanket over the reopening jubilation. That is what I was trying to get out in my question on today’s editorial. If we keep seeing inflation outpace rates it will keep real rates negative (which is good for gold), but if they let rates run and start to taper, then we likely would see a taper tantrum again, like we saw back in 2013, and just after a bit of jawboning about getting more hawkish in 2018. The Fed doesn’t want a market tantrum, but if they truly believe the economy is doing great and reopening trade is here, then they will be questioned about dialing back their bond purchases, and tightening rates, like other countries are starting to do in front of the US. They are stuck between a rock and a hard place on this one.

            Jun 14, 2021 14:47 PM

            Rising prices: What meat, clothing and five other everyday items tell us about inflation

            Abha Bhattarai, Alyssa Fowers 1 day ago

            “Consumers are paying more for a range of products, including bacon, blouses and used Buicks, as the economy rebounds strongly from the covid-led recession with considerable help from Congress and the Federal Reserve.”

            “The overarching question is whether these price increases will stick — and for how long. Fed officials have so far maintained that the hikes will dissipate fairly quickly, though some economists warn the trend could be more lasting.”

            “Costs of raw materials, such as lumber, paper, steel, glass and plastic, as well as manufacturing and shipping, are rising in line with rebounding demand. A widespread microchip shortage is adding to retailers’ struggles by making it harder to automate supply chains and keep operations running smoothly,” said Greg Portell, a partner in the consumer practice at consulting firm Kearney.

            “You have inflationary pressures from two sides: The cost of materials is going up at the same time that demand is rising,” he said. “Typically you have one or the other but now you have both, which is creating the crunch.”

            https://www.msn.com/en-us/money/markets/rising-prices-what-meat-clothing-and-five-other-everyday-items-tell-us-about-inflation/ar-AAKYcvT?ocid=uxbndlbing

            Jun 14, 2021 14:48 PM

            E.B. Tucker – Inflation is like ‘cocaine addiction’, the Fed is hooked and wants more

            Kitco News – June 10, 2021

            The government wants higher inflation and is creating policies that would be conducive to higher prices and higher wages, said E.B. Tucker, director of Metalla Royalty.

            0:00 – 5% headline CPI
            5:30 – Why would government want more inflation?
            9:46 – Fed’s next steps?
            14:06 – Inflation vs wages
            16:09 – Inflation hedges
            18:50 – Mining company margins

            https://youtu.be/rKArqlGcuQ0

            Jun 14, 2021 14:52 PM

            I posted this on the weekend show in response to E.B. Tuckers Kitco interview, which I thought was fantastic, and will just repost it here since it deals with inflation.
            _________________________________

            E.B. Tucker cracks me up, and he is spot on about the FED wanting inflation, which leads to higher prices, higher GDP, higher wages & payroll tax, and ultimately higher taxes for them the government to collect.

            He’s also spot on about the inflation in commodities from Coffee, to Sugar, to Lumber, to Copper, to Nickel, to Steel, to Oil, etc…. not being just transitory. Commodities are still at historically low valuations relative to the stock markets, and relative to many other comparable metrics.

            When commodities prices rise, when the costs of services rise, when the costs of energy rise, when the cost of freight rises, and when the wages grow, there will be Cost-Push Inflation. Then they touched on the real estate market where home prices are up to insane levels, as is the costs to build homes or repair homes. Sourcing building supplies or getting appliances are now on big waiting lists or are far more expensive than they were a year or two ago, and we are seeing now slow down in this trend.

            There has been reckless new money creation for years, but it really has gotten extreme for over the last year. Another key difference we’ve been seeing the last year or so is that the government stimulus checks and the Payment Protection Plan handouts/bailouts to businesses are going directly into the hands of people, so these handouts/bailouts are finally increasing the Velocity of money (something that wasn’t really happening in the prior QE measures).

            The inflation we are seeing in CPI may trend back down for a month or 2, but longer term, inflation will persist. Once the inflation genie is let out of the bottle, then it is hard to get it back in. E.B.’s questions to David in the interview were on point, when David said he was just going to wait for food/energy/goods costs to come back down, and he asked “Why would prices start coming back down?” Bingo.

            The government and central banks want inflation, to print their way out of the massive debt, but this is a silent and insidious tax on the common people and citizens of the nation that these organizations supposedly serve.

            For those that have been saving or hording cash, they are going to soon realize their fiat money doesn’t go quite as far, and their buying power is getting eroded by inflation at a much higher rate than what we see in the bogus CPI figures in the first place. Just go to the grocery store or the gas tank and ask if we are seeing inflation, or if it looks transitory.

            At this point the goose is cooked… and people need to think about how they are going to preserve their wealth and purchasing power, and that is not going to happen cowering in fiat cash.

            Jun 15, 2021 15:57 AM

            Preserving your wealth…… humm
            Gold…..1971 …. $35
            Gold……2021…. $1900

            Jun 15, 2021 15:58 AM

            00TB
            Where can I get some 1971 Gold. That sounds like a better buy.

            Jun 15, 2021 15:40 AM

            Great point OOTB. Gold is one of the best preservers of wealth. Always has been.

            Also great point David. If you want to find a way to buy Gold for less than were it is now and closer to 1971 levels, then you can’t do that with above ground gold, but one can do that through buying mining companies as they unlock the gold they have in the vault of the Earth. The best way to buy ounces on sale is to acquire gold that is still in-situ. Cheers!

            Jun 20, 2021 20:05 AM

            Preserving your wealth….humm

            If you would adjust gold for the real rate of inflation then gold is not that good for preserving your wealth as you paint.