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Fed Watch: Is An Economic Storm About To Hit?

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewApr 26, 2021 04:24AM ET
www.investing.com/analysis/fed-watch-is-an-economic-storm-about-to-hit-200575260
Fed Watch: Is An Economic Storm About To Hit?
By Investing.com (Darrell Delamaide/Investing.com)   |  Apr 26, 2021 04:24AM ET
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The Federal Open Market Committee is not expected to announce any policy changes after its two-day meeting this week, or even to provide any concrete guidance about when it will start tapering its asset purchases as a prelude to raising rates.

Economists expect the Fed policymakers to amp up their view of economic growth, while reassuring investors, as they have in the past few months, that they will not let up on monetary stimulus until there is a lot more improvement in employment, including fixes in structural employment. Inflation, they keep saying, is not a problem.

Larry Lindsey, who was director of the National Economic Council under President George W. Bush and a Fed governor in the 1990s, thinks the Fed is underestimating the risk of inflation. Demand is being fueled by massive government spending, which is not likely to abate next year ahead of the midterm election, while supply is increasingly constrained by shortages.

Moreover, in his view, these shortages include skilled labor. Fed officials may want to improve the equity in employment, but they cannot give unskilled workers the training they need to provide what companies need. This means firms will have to offer higher wages to hire the workers they want and the Fed’s ambition for maximum employment across the board may be frustrated by inflation.

UST 10Y Weekly 2018-2021
UST 10Y Weekly 2018-2021

Lindsey, who got his doctorate in economics from Harvard University, thinks the yield on the 10-year Treasury note—a measure of investor fears on inflation—will hit at least 3% by the end of the year, about double what it is now.

You won’t hear any of that from Fed Chairman Jerome Powell when he talks to journalists on Wednesday. He will talk about the benefits of fiscal stimulus, the presence of downside risks, the need for maximum employment, and the Fed’s commitment to stay the course even if there is an uptick in inflation.

The Bank of Canada last week decided to reduce its weekly bond purchases by C$1 billion to C$3 billion and hinted that the economy might need an interest-rate hike by the second half of next year. Some analysts considered the move by Canada’s central bank to be an outlier, but others think it might be a preview of what all big central banks will be forced to do.

The Bank of Canada has a simple mandate to limit inflation to 2%, but the central bank is now forecasting a 2.4% rate of price increases by the fourth quarter of 2023.

The European Central Bank, on the other hand, boosted its bond purchases in March to €74 billion, up from €60 billion and €53 billion in the first two months of the year. ECB President Christine Lagarde said the Eurozone’s central bank will keep up the faster rate of purchases to support the lagging European economy. It has earmarked €1.85 trillion for asset purchases through March of next year.

The U.S. will announce a preliminary estimate for first-quarter GDP growth on Thursday with the consensus forecast at 6.5% after 4.3% in the previous quarter. But economists at ING say the annualized growth rate could top 7%, and be in double digits in this year’s remaining quarters. They also see inflation nearing 4% in May.

If they are anywhere near right, this kind of data could force the Fed to think harder about tapering its asset purchases and moving forward its forecast for rate hikes. And the Fed has learned the hard way that it needs to communicate its intentions to investors well ahead of time. With the next FOMC meeting set for mid-June, this week’s monetary policy meeting may be the last tame one for a while.

Fed Watch: Is An Economic Storm About To Hit?
 

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Fed Watch: Is An Economic Storm About To Hit?

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Comments (11)
Dave Jones
Dave Jones Apr 28, 2021 3:14AM ET
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Everything is awesome!
Alan Ketin
Alan Ketin Apr 27, 2021 6:47PM ET
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They are not reporting the actual inflation rate Keep pumping money to companies so the stock market goes to the moon as the crypto people say
Raymond Huggard
Raymond Huggard Apr 27, 2021 5:14PM ET
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The international economic summit next month will tell the tale.
Rudy Haugeneder
Rudy Haugeneder Apr 26, 2021 7:39PM ET
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With the real consumer inflation rate (actual rather than the official rate) being at least -- at least -- 10% at the low end, the future bite starting right now, at this minute, is likely five points higher. And that bites, especially as the federal freebie money ($1,400 each) goes to waste as people spend it without thinking because they believe more, much more, is on the way. Unless the coffers are further opened, this means the consumer will be really, really hostile by July, and likely take to the streets in action that will make the BLM movement seem very tame. That is my forecast. Plan for it accordingly, whether you are among the soon to be disappointed, or already there -- and broke.
Raphael Fabrizi
Raphael Fabrizi Apr 26, 2021 7:39PM ET
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You need serious counseling and an education.
Phil Smith
Phil Smith Apr 26, 2021 12:24PM ET
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No they wont they will keep buying it all
Brandon BB
Brandon BB Apr 26, 2021 10:28AM ET
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they can't stop the low interest rates, asset purchases, money printing/spending or debt bubble. if they do anything to taper off any off this stuff, the entire market will collapse and they know it. the game plan seems to be keep the gravy train going for as long as possible with massive currency devaluation (really no choice but to do this). Weimar Republic style hyper inflation is on the way, and most people sense this. it's the only thing that explains the price explosion in stocks, real estate, metals and crypto. people are searching for any type of alternative to holding dollars because their purchasing power is being eroded daily.
Cameron Hamm
Cameron Hamm Apr 26, 2021 10:28AM ET
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while traditionally your comment is by the books, I have a competing view that history will show this time to not be inflation but an overall market correction directly linked to future currency changes linked with crypto
Kian Amini
Kian Amini Apr 26, 2021 10:07AM ET
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price of everything is up...we have no inflation? they are fudging the numbers...as usual cra//pp has to hit before fed take any action.....gooood luck!
Steve Siew
Steve Siew Apr 26, 2021 8:49AM ET
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Inflation will be the Fed dream come true but there will mot be. We are in deflation. I beluevr it when i see sustainable inflation
Andrew Allen
Andrew Allen Apr 26, 2021 8:49AM ET
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how much does lumber cost? is this price higher or lower than usual? The money supply IS being inflated, so how exactly are we currently in deflation?
Mihir Patel
Mihir Patel Apr 26, 2021 8:49AM ET
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Lol
William Ormsby
William Ormsby Apr 26, 2021 8:49AM ET
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lumber, copper, oil, food... where are you looking?
nssskk nath
nssskk nath Apr 26, 2021 8:48AM ET
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Big big big profit bookings will happen in US Markets leading to 1500/2000 points drop in Dow Jones...
Mahmoud Zaki
Mahmoud Zaki Apr 26, 2021 8:48AM ET
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I think you mean 3500 but more likely 3800.
Daniel Morel
Daniel Morel Apr 26, 2021 8:04AM ET
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Wages growing up with more people having more money to spend what's wrong with that? yes, they'll be a little bit of inflation but I never seen an economy tanking because of  sub-marginal move in price leading to some inflation pressure. Would you rather have the current situation or the opposite?
Andrew Allen
Andrew Allen Apr 26, 2021 8:04AM ET
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Clearly you weren't around in the 70s and have never heard of Zimbabwe, Argentina, or Venezuela
Andrew Allen
Andrew Allen Apr 26, 2021 8:04AM ET
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higher wages don't mean higher purchasing power if prices of goods rise faster
Jon Bal
Jon Bal Apr 26, 2021 8:04AM ET
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yes. i am asking for a 25% raise this year
Fred Diebold
Fred Diebold Apr 26, 2021 7:58AM ET
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YES - Bidens Tax plan will sink the economy and make most poorer. Typical Socialist policy.
 
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