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Will The Fed Admit They Are Wrong About Transitory Inflation?

By Michele SchneiderStock MarketsOct 14, 2021 01:38AM ET
www.investing.com/analysis/will-the-fed-admit-they-are-wrong-about-transitory-inflation-200605010
Will The Fed Admit They Are Wrong About Transitory Inflation?
By Michele Schneider   |  Oct 14, 2021 01:38AM ET
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For the past year, the Fed has stuck to its guns on the idea that supply-chain disruptions are causing a short-term increase in inflation, and that in 2022, inflation will decrease towards their 2% target. However, with continuous news of job shortages, shipping problems, rising food costs, and more, it doesn’t look as though inflation is going away anytime soon.

IWM Weekly Chart
IWM Weekly Chart

On top of that, the Core Consumer Price Index, which the Fed uses to gauge inflation has shown yet another increase of 0.2% in September bringing it up to 4% year-over-year.

Now the Fed is faced with a shift of changes that are not so transitory.

For instance, a mass wage increase has spread across the United States along with rising rent prices. Both rent and wage increases tend to stick in price as landlords don’t look to decrease rent and employees don’t expect their jobs to suddenly pay less. This leaves the Fed with their back against the wall as they don’t want to cause worry, but should face the fact that the longer it takes for the country to get back to pre-pandemic times, means a continued shift in living costs.

With that said, what does this mean for the market as investors seem to be catching the hint that pandemic related issues and rising inflation will continue into 2022? One possibility is the market could easily run into a stagflation type of environment with continued growth but more rangebound market price action.

A great example is the small-cap index Russell 2000 (IWM) which has been rangebound for most of this year. While the other major indices have continued to new highs, IWM has made little progress. Even with the recent market pullback the other major indices have struggled to make a clean rebound and are looking a bit choppy.

Currently, the intermarket relationships are still friendly right at the start of earnings season. Should earnings do well, that could spark a rally into December with the risk gauges positive.

However, these relationships can also deteriorate if, like with JPMorgan Chase & Co (NYSE:JPM), earnings create stress.

If this is the cause, and market momentum continues to fade, then like IWM, we should begin to watch if the other indices, including the S&P 500, Dow Jones, and NASDAQ 100 begin to show real warning signs of impending stagflation.

ETF Summary

  • S&P 500 (SPY) Held the 10-DMA at 434.
  • Russell 2000 (IWM) Consolidating with support at 216.76. Back over the major moving averages.
  • Dow (DIA) Weak close over the 10-DMA at 343.65.
  • NASDAQ (QQQAlso held its 10-DMA at 358.75.
  • KRE (Regional Banks) Needs to get back over 70.
  • SMH (Semiconductors) 249.02 support.
  • IYT (Transportation) Large range day. Sitting on major moving averages at 250.
  • IBB (Biotechnology) 153.38 support.
  • XRT (Retail) Holding the 200-DMA at 89.52.
  • Junk Bonds (JNK) 108.06 support.
  • SLV (Silver) Holding the 10-DMA at 20.78.
  • USO (US Oil Fund) 54.949 support the 10-DMA.
  • TLT (iShares 20+ Year Treasuries)  Watching for a second close over the 200-DMA at 144.51.
  • DBA (Agriculture) Watching to hold 19.00.
Will The Fed Admit They Are Wrong About Transitory Inflation?
 

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Will The Fed Admit They Are Wrong About Transitory Inflation?

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Comments (6)
Robin Hood
RobinHdJr Oct 14, 2021 2:55PM ET
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We are going to see inflation like we did back in the 70s. If FED wants to do more than simply knee jerk reaction to the whims of the economy, they need to look further down the road and examine demographics. America is undergoing a MAJOR demographic shift right now, the likes are unprecedented. COVID has little to do with it. In a nutshell, for every silent gen to baby boomer was 2:3; baby boomer to my generation, gen x is 3:1; and gen x to millenials is 1:2. When boomers started retiring in 2007 (= 1945 + 62), they withdrew money from the stock market, and real estate, crashing both; while driving up costs for social security and health care. We've suffered long during that shift. Now the millenials time to rise, a larger shift than when boomers came of age in late 60s and early 70s. Car shortages, supply shortages, massive inflation. Get gold while you can!
Robin Hood
RobinHdJr Oct 14, 2021 2:55PM ET
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My generation was ... basically aborted
Vinny din
Vinny din Oct 14, 2021 4:30AM ET
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Before you decide the FED is wrong you should examine your position. I believe that you are wrong, once again the sky is not falling.
Puck roger
Puck roger Oct 14, 2021 4:14AM ET
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why would they we are 30 trillion dollars in debt and these evil liberals see no point to stopping the spending. maybe the FED could cut down on their spending a little bit but that's all priced in
Steffen vdm
Steffen vdm Oct 14, 2021 4:14AM ET
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once the printing stops, taxes will be raised. Stopping/reducing expenditures is out of the question
Ejidiran Hammed ayofe
Ejidiran Hammed ayofe Oct 14, 2021 4:06AM ET
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what is division now
Ohinosen Believe
Ohinosen Believe Oct 14, 2021 1:43AM ET
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hello
William Bailey
William Bailey Oct 14, 2021 1:41AM ET
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You mean … admit they lied
Zinzi Siswana
Zinzi Siswana Oct 14, 2021 1:41AM ET
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They lied
 
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