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Why Is the Fed Still Tilting at Fading Inflation?

By Gary TanashianMarket OverviewSep 08, 2023 04:02PM ET
www.investing.com/analysis/why-is-the-fed-still-tilting-at-fading-inflation-200641698
Why Is the Fed Still Tilting at Fading Inflation?
By Gary Tanashian   |  Sep 08, 2023 04:02PM ET
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With inflation fading, the US Federal Reserve continues the fight against… inflation!

The question is ‘why?’ Why do Jerome Powell and the Federal Reserve continue to tilt against the fading enemy known as inflation?

The obvious answer is that the Fed knows how much money it created out of nothing (other than net debt, which taken literally is less than nothing) that it pumped into the economy. That was when a locked-down society, following the lead of the monetarily inflating Fed and the fiscally stimulating government, simply tapped the heels of its ruby slippers and wished for an economic resurgence to come true. But, Nothing + Less Than Nothing + New Money + Temporary Growth = Even more Less Than Nothing Later. You see?

The Fed continues to tilt at its windmill despite the change in even “sticky” prices tanking from a year ago. These are the more persistent inflationary effects. While they have begun rolling over from extreme levels when viewed literally, the change from a year ago is striking. As you can see, such weakness in these prices usually coincides with a recession (shaded) either sooner or not much later.

Sticky Price CPI
Sticky Price CPI

St. Louis Fed

Food prices sure are not an issue globally, although you might find your local grocer and/or its supply chain gouging as long as they can, given the major media hype that inflation still enjoys.

World Food Price Index
World Food Price Index

The inflation rate has bumped up within its declining trend from Q4, 2022, which we anticipated back then as one of the rationale for a coming stock market rally. *
Inflation Rate
Inflation Rate

Inflation Rate (TradingEconomics.com)

* The others being extremely over-bearish market sentiment at the time along with the mid-term election cycle, which is positive, on average.

The reason for the July bump up? Well, crude oil, which drives the CRB Commodity index, rose strongly in July. Now, is this inflation, or is it the result of price rigging by a desperate OPEC+? I’ll take ‘B’, desperation, Alex.

Crude Oil-BI Monthly
Crude Oil-BI Monthly

TradingEconomics.com

So what is driving the Fed’s policy? Could it actually be chasing outlier issues like a market manipulating OPEC? Unlikely. OPEC’s manip is not making Americans feel richer. If anything, it would stress them more, financially.

Is it the very stock market bubble that the Fed itself created and sustained for the last many years? Well, insofar as it has made Americans feel relatively wealthy (or kept many from feeling destitute), just maybe the Fed would like to see extreme moderation in this inflated mess. The stock market has been a major beneficiary of previous inflationary policies. You could say that the Fed literally printed bull markets in 2002, 2008, and 2020 through various means of MMT (Modern Monetary Theory) also known as TMM (Total Market Manipulation).

SPX Monthly
SPX Monthly

Is it the bond market rebellion, shoving inflation signals right up the Fed’s keister from inflation cycles past? Very possibly. It could be the point of saturation whereby the license to inflate in the future has been withdrawn or severely limited by the bond market.

30 Year US Treasury Yield Index
30 Year US Treasury Yield Index

Maybe that is what the Fed is primarily reacting to. Trying to restore its good name as a financial steward. But of course, if you’ve been paying attention during the course of the decades-old continuum you know that the Fed’s name has not been good.

Its name is Nosferatu, and it has simply been sucking the blood out of the financial system and economy by taking the license granted by the bond market’s disinflationary signaling and printing asset bull markets as needed by increasing the supply of funny munny relative to said assets.

To use another image, the Vampire needs to be invited into your home in order to do its business. Referring to the continuum above, my theory is that the bond market is withdrawing its standing invitation for the Fed to inflation at will and as needed.

Again, license revoked?

Meanwhile, the 2-year Treasury yield keeps dragging the Fed hawkish on the short end of the bond market, even though the divergence currently in play will likely lead directly to a bear market, as has been the historical norm.

3-year US Treasury Yield Index
3-year US Treasury Yield Index

Sure, the US government is debt spending on roads, bridges, and all manner of other interests in order to grease the pump for the next presidential election. That is fiscal policy and when it is promoted by creating new debt it is not altogether different than the Fed’s monetary policy-fueled inflation cycles. Is the Fed fighting the government’s actions in this case? To a degree, I suppose.

But the bottom line is that the financial markets have handcuffed the Fed to the degree that for whatever reason, it was forced into its hawk suit (recall how stubbornly they refused to acknowledge the inflation problem… “transitory, transitory, TRANSITORY I tell you… oh wait, NOT transitory!!”). And until something breaks, it may not be released from that suit.

Meanwhile, with a constrained inflationary benefactor, AKA the Federal Reserve, what do you suppose the bombed-out Gold/SPX ratio will do when the bear arrives? Gold is near all-time highs and thus vulnerable, you say? Well, perhaps to a degree, within the volatile post-2020 handle consolidation. But that green ratio is going to the bottom and turn up, which the 10yr-2yr yield curve is already posturing to do. A steepening yield curve usually goes with the “bust” side of the boom/bust cycle.

There will be plenty of reason to value gold in this coming environment where markets could be set relatively free of the type of destructive, inflationary and bubble-making environment we’ve had most intensely for over two decades now.

Gold is the anti-bubble, after all.

Gold Chart
Gold Chart

Why Is the Fed Still Tilting at Fading Inflation?
 

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Why Is the Fed Still Tilting at Fading Inflation?

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Comments (6)
leehiung chong
leehiung chong Sep 13, 2023 9:56AM ET
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Do you see any data of hot money coming into US from lower rates countries possibly stoke inflation or asset bubble ?
Richie Berg
Richie Berg Sep 10, 2023 6:14PM ET
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If monetary policy works with a lag, are we still receiving inflationary effects from the cheap money, or did that stop instantly when the FED started raising rates?
Jason Patcher
Jason Patcher Sep 10, 2023 1:44PM ET
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good article. my nuance - perhaps you could decouple your use of federal reserve and include the fed chair by name. they are each different, Powell is not Greenspan and they are both different than bernackie ...
Conrad Conrad
Conrad Conrad Sep 10, 2023 9:35AM ET
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Excellent analysis. Glad you wrote it, or I was gona' have to comment it. It's not consumer prices, it's the absolutely insane parabolic valuations of AAPL,GOOG, META, MSFT and the likes. The only way to chop the head off of that snake is interest rates to the moon Alice!
Chart Harmonics
Chart Harmonics Sep 10, 2023 6:25AM ET
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Greatt article Gary!
JaneJohn Doe
JaneJohn Doe Sep 09, 2023 10:04PM ET
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Living under a rock much? Inflation is ticking back up, just look at the expectations for CPI report due on Wed. Aug CPI MoM is at 0.6% which is 7.4% annualized.
Jason Patcher
Jason Patcher Sep 09, 2023 10:04PM ET
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yeah but everyone expected it to bump up occasionally. If inflation is half what it was 6 months ago, the harder it gets to continue every month; or, it gets harder the closer you get to 2%. They have to talk tough and do a pause or housing (or something) will break.
 
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