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The Federal Reserve on Wednesday announced it will raise its benchmark short-term interest rate by half a percent to combat inflation in the U.S., which is at a 40-year high.
The rate hike is its most significant hike in 20 years and the Dow Jones Industrial Average 932 points on the day. Nasdaq gained 401 points. Gold was up $15.20 an ounce.
The Fed also announced plans to reduce its $9 trillion balance sheet, which skyrocketed during the COVID-19 outbreak.
Jay Powell, the Fed chairman, spent months referring to inflation as “transitory,” but changed his tune in April when he said it was time to be “moving a little more quickly” to tighten monetary policy.
“We make these decisions at the meeting and we’ll make them meeting by meeting, but I would say that 50 basis points will be on the table for ... May,” he said at a panel hosted by the IMF.
The Fed committee said in a statement that it “anticipates that ongoing increases in the target range will be appropriate.” The next meeting will be in June.
The 10-year Treasury yield hit 3 percent on Monday, for the first time since late 2018. The annual inflation rate in the U.S. hit 8.5 percent in March of 2022, which was the country’s highest since December 1981.
Gerald Celente, the publisher of The Trends Journal, spoke with Peter Schiff, the economist, about the upcoming rate hike. Schiff said the Fed has been moving too slowly.
“Even if they raise them in 50 [basis] point clips, that’s still way too slow” to combat inflation, Schiff said.
Some economists told The Wall Street Journal that the Fed will have to raise the rate even higher “just to maintain a neutral setting because underlying inflation is so high.”
Jim Caron, chief fixed income strategist on the global fixed income team at Morgan Stanley Investment Management, told CNBC that the Fed will likely raise rates 50 basis points, “and it seems like they’re dead set on hiking rates enough to kill inflation.”
“But that’s the real debate. Are they trying to get to target inflation by 2024? If they are, the wage inflation is pretty high and that will require even more tightening than the Fed is projecting,” he said.
Bank of America said: "We expect a hawkish May FOMC [Federal Open Market Committee] meeting with the Fed delivering a bigger 50bp rate hike and announcing QT, starting in June... It will be hard for Fed to out-hawk the market. A non-committal Powell on 75bp June hike risks slightly dovish market outcome."
Danielle DiMartino Booth, CEO of Quill Intelligence and a top advisor to former Dallas Fed President Richard Fisher, told CNBC that the Fed will have to increase rates enough to “maintain credibility,” and then shrink the balance sheet…and Powell’s “going to have to take the recession that comes with it.”
How Did We Get Here?
In December 2020, Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July 2021, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens.”
Wrong, wrong, and wrong.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation this year would be 2.4 percent.
Instead, it topped 6 percent in October and has averaged 4.1 percent from January through October.
Until November, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
So when we hear Powell declare that the Fed will use all of its tools and “take necessary steps” to vigorously fight inflation, we also notice that he failed to say exactly when that would happen.
Note to readers: In “ECB Economist Does a 180 on Inflation” (22 Feb 2022), The Trends Journal diagnosed Powell’s condition as “Central Bankster Syndrome,” marked by the compulsion to see soaring prices as “temporary” or “transitory” until long after inflation has rampaged through the economy unchecked.
Key Numbers On The Health of the U.S. Economy
-About 25.6 million Americans, more than 10 percent of all adults, borrowed money from family or friends between 30 March and 11 April to meet basic expenses, the U.S. census bureau’s Household Pulse survey reported.
-Oxford Economics predicts U.S. growth will slow from 3.1 percent this year to 2 percent in 2023. Other analysts foresee a growing likelihood of a recession next year.
-During April’s third week, the number of applications for adjustable rate home mortgages doubled from the last quarter of 2021 as interest rates for 30-year, fixed-rate mortgages climbed to their highest since 2009.
-More than two-thirds of U.S. counties with an urban center and a population of 250,000 or more lost population last year for the first time in 50 years, according to federal data analyzed by the bipartisan Economic Innovation Group.
-The Personal Consumption Expenditures Price Index, the U.S. Federal Reserve’s preferred measure of inflation, sped along this year through March at 6.6 percent, the U.S. Bureau of Economic Analysis reported.
TREND FORECAST: How much is to “err on the side of doing too much”? The bet on The Street is that the Federal Reserve will raise interest rates by 50 basis points this week. On the longer haul, others are betting that even if the Fed raises rates aggressively in the coming months, its aggressive monetary tightening is already priced into markets. We maintain our forecast that with each interest rate rise, equity markets and the economy will decline. Therefore, the higher interest rates rise, the deeper they will both fall. (Subscribe to The Trends Journal for more.)
The Fed was woefully late to recognize inflation’s danger to the economy and its long-term post-COVID recovery.
The Trends Journal has long documented the Fed’s blindness. Now the Fed has two choices: jack up rates quickly, which would guarantee a recession, or raise rates more slowly, which would let inflation sink roots into the economy and be much harder to eradicate. We have no confidence that this Fed, or any central bank, has the skills needed to raise rates high enough fast enough to stymie inflation without crashing the economy. Historically, a recession has been needed to halt inflation moving at such a high rate of speed. We believe the same is true now.
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