Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

The Fed Is Taking A Huge Gamble On Inflation

By Michael KramerMarket OverviewJul 30, 2021 03:55AM ET
www.investing.com/analysis/the-fed-is-taking-a-huge-gamble-on-inflation-200594814
The Fed Is Taking A Huge Gamble On Inflation
By Michael Kramer   |  Jul 30, 2021 03:55AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com

On Wednesday, July 28, the Federal Reserve left monetary policy unchanged. The bank indicated that the economy was beginning to progress towards the goals it said would result in a change of policy, but noted that much more was needed. However, we expect that when the time comes, the Fed will likely need to act much more aggressively than anticipated.

During the press conference, it became crystal clear what is holding the Fed back is employment. The latest economic data would support the idea that inflation is running above trend, and Jay Powell indicated that inflation was above the Fed's 2% target. The Fed has noted many times it would like to see a string of solid job reports. Thinking about this implication and taking it one step further, the Fed seems to be so confident in its view that inflation rates will come back down to its target that it is willing to gamble on inflation while waiting for employment. 

10-2 Year Treasury Spread
10-2 Year Treasury Spread

Since the June meeting, the bond market has seemed nervous, and that nervousness appears to have been reaffirmed following the July FOMC meeting. The reaction of long-term rates moving lower in recent weeks and short-term rates rising has flattened the yield curve dramatically. As we know that flattening of the curve is a cue that the bond market is projecting slower economic growth in the future.  

More interesting, though, by the Fed waiting on the employment component of its dual mandate there is a risk that inflation rates will move up even more. The bond market appears to be taking the stance that the Fed may need to act much more aggressively when ending the current monetary policy and switching to a tightening stance, slowing economic growth once the cycle begins.

10-Year Breakeven Inflation Rate
10-Year Breakeven Inflation Rate

While it isn't evident just when the Fed will feel that further progress has been made, since there doesn't appear to be an actual target, one can assume that a string of robust employment reports is what will trigger the Fed to embark on this tightening cycle. If that is what the central bank is waiting on, that signal could come as soon as September or October.  

Many states have already started to end the extra unemployment benefits in July. By September, the remaining states will have completed the additional programs. If this is the case, then the strong June employment report should carry over into the July report, followed by a strong report in August and September. It would position the Fed with three jobs reports heading into the September meeting and four reports by October. If it is a string of employment reports the Fed wants, Powell should have that string of reports by September or October.  

But clearly, the big gamble here is that with the Fed waiting to move on monetary policy and not starting to taper its balance sheet a little bit, it is taking a chance that the inflation rates will move even further away from the 2% target. Currently, 10-year breakeven inflation expectations are around 2.4% and have been well above 2% for some time, while 5-year breakeven inflation rates are even higher, at nearly 2.6%.  

If the bond market is correct, economic growth will slow in the future and, by the looks of its sooner than most think. It will be because the Fed is playing catch-up resulting in the much more aggressive monetary policy that could have been avoided had the taper come sooner.  

The Fed Is Taking A Huge Gamble On Inflation
 

Related Articles

Brad McMillan
The Next Crisis: The Debt Ceiling By Brad McMillan - Sep 23, 2021 4

After the past several crises, some real and some manufactured, we are now on our way to the next one: the debt ceiling. To pay for the spending Congress has authorized, the...

The Fed Is Taking A Huge Gamble On Inflation

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (20)
Jesus Iglesias
Jesus Iglesias Aug 02, 2021 10:32AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Too many mistakes. Too pessimistic. I do not recommend the articles of M. Kramer. Regards.
petet lurkar
petet lurkar Aug 01, 2021 8:00PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
gdp came in lighter than expected without tapering..I trust in our fed more than this guy who has lost money for his investors
Steven Jacobs
Steven Jacobs Aug 01, 2021 8:00PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Agreed
Dũng Nguyễn Đăng
Dũng Nguyễn Đăng Jul 31, 2021 12:22AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It literally means that the potential stagflation is comming up, while both inflation and unemployment rate will hover at a high level. This scenario will be really potential if the Fed's easing effort is fail. Nonetheless, i still bet on the successful outcome, can't wait to see the upcoming data about the labor market
Benjamin McIntire
Benjamin McIntire Jul 30, 2021 11:46PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Attributing way too much to timing of rates. A few more months without a a quarter point increase isnt going to destroy future growth meaningfully.
Steven Jacobs
Steven Jacobs Jul 30, 2021 11:46PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Agreed. Its like they want people to want a rate hike. The banks are the ones that ***people w these interest rates going up.
Antonio Fernanda
Antonio Fernanda Jul 30, 2021 3:33PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
We all dont have to blame the Americans on any, we have more online opportunities to invest on
Syed Naqvi
Syed Naqvi Jul 30, 2021 12:49PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
When people like Michael Kramer write articles like these to mislead investors, it shows that they are not willing to listen to what the Fed is actually saying. Due to continued covid uncertainty and nowhere near full employment, there cannot be a hike in interest rates. That means that at least until the end of next year or early 2023, that is good news for stocks. Don't be fooled by MSM on the stock market. The general trend is still upward and liquidity will remain for stocks and with positive earnings, expect a further increase short to medium term in stock prices.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Jul 30, 2021 12:04PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Americans and all others take huge gambles with their Constitutions every day. so what is wrong if fed does huge gambling trying to shoot for full employment and in the process one more term of 4 years?
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Jul 30, 2021 12:00PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Well, that is what the Fed does, take huge gambles. that is their job. full employment vs. inflation is an old subject. tradeoff is what economics tells you to do
Wankel YU
Wankel YU Jul 30, 2021 11:46AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Fed wanna kill the USD, DXY will below 50 soon
charles savoree
charles savoree Jul 30, 2021 11:29AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Where to start, First , the existence of the Fed violates the Constitution. Second, the Fed is just a political puppet. Third the Fed is incompetent. WOW, We're screwed !
John Whitfield
John Whitfield Jul 30, 2021 11:29AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
fed is not the downfall congress is. theyre the reason why inflation is so high to begin with.
Gregory Me
Gregory Me Jul 30, 2021 11:18AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The libs will find out some way to destroy the economy they inherited along with taking away your freedoms.
Debt Deflation
Debt Deflation Jul 30, 2021 11:18AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
🤡
Cody Olson
Cody Olson Jul 30, 2021 11:11AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Our economy is addicted to stimulus
Takwa Abidi
Takwa Abidi Jul 30, 2021 11:11AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Ibeyaima Brahmacharimayum
Ibeyaima Brahmacharimayum Jul 30, 2021 11:10AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
thaks
chinagolueloke eloke
chinagolueloke eloke Jul 30, 2021 11:10AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
thanks
Old Stone
Old Stone Jul 30, 2021 11:08AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Typical kick the can down the road, 6 tril later..still kicking it
Raw Quantum
Raw Quantum Jul 30, 2021 11:06AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
They know deflation is coming. Nobody else seems to think prices can ever go down. U know the saying “what goes up must only continue to go up” ???!?
Steve Pettegrew
Steve Pettegrew Jul 30, 2021 11:05AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Stop handing out money to people who won't get a job! EVERYWHERE IS HIRING!!!
Takang Nelly
Takang Nelly Jul 30, 2021 11:02AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
help me earn some money please
Moongill Jean
Moongill Jean Jul 30, 2021 11:02AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Shame on fed
Joseph Armour
Joseph Armour Jul 30, 2021 8:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Hmmmmm............
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email