Federal Reserve Finally Admits it was Wrong about Inflation — NOT Transitory!
Not even close to transitory. After giving its turkey advice for Thanksgiving, the Federal Reserve finally gave up completely on the “Inflation is transitory” chorus it has been singing all year. Chairman Powell of the People’s Bank of Amerika stated outright today that inflation is not transitory after all,confirming what I have been preaching all year, and he stated that inflation may likely force the Fed onto an even faster tapering path than the it already laid out, confirming the second part of what I have said all year:
Wall Street’s main indexes closed lower on Tuesday after Federal Reserve Chair Jerome Powell signaled that the U.S. central bank would consider speeding up its withdrawal of bond purchases as inflation risks increase, piling pressure onto a market already nervous about the latest COVID-19 variant. In a testimony before the Senate Banking Committee, Powell indicated that he no longer considers high inflation as “transitory” and that the Fed would revisit the timeline for scaling back its bond buying program at its next meeting in two weeks
And, so, with that the stock market also responded in the manner I have said it will when the Fed actually starts tapering and speeds up its tapering because inflation grows to be so searingly hot the Fed cannot avoid speeding up its tapering of QE. Just talk that the Fed will be thinking about picking up the pace at its next meeting, sent the Dow down more than 600 points today, after having plunged more than 800 on what I’ll call Dark Friday. While the market recovered a mere third of its losses on Monday, it lost more than double what it recovered today, putting it already halfway into a correction (down 10% from a previous high).
“Powell’s comments threw a monkey in the wrench in market thinking in terms of potential taper timing. You’re seeing as a result of that, risk-off across the board,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles…. Whether … more headline risk or reality risk … it’s having a significant impact on oil, and everything that’s tied to economic growth.
“The principal contributor to the decline in stock prices today is the Powell commentary, regarding the upcoming Fed meeting, about accelerating the tapering of their bond buying program, which obviously leads to the prospect that rate hikes come sooner next year,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. “That somewhat hawkish shift in tone caught the market flatfooted,” Luschini said.
It wouldn’t have if the market listened to me, but for some reason some people — a great many in fact — found this readily predictable news entirely surprising. So, some of the market’s denial broke today. Whether that is a significant break that sets in the market’s demise that I have been predicting inflation will cause or just another shiver, remains to be seen. Denial dies hard, but it was a pretty deep shiver:
The declines were broad-based, with all the 11 major S&P sectors down…. “The market is clearly in some treacherous waters right now. You’ve had two significant pullbacks out of the last three trading days. This is certainly shaking some of the complacent longs in the market,” said Wedbush’s James.
Powell explained in his warning,
I think you what you’ve seen, is you’ve seen our policy adapt and you’ll see it continue to adapt to we will use our tools to make sure that higher inflation does not become entrenched.
Yes, they will because, as I’ve recently started claiming, inflation has reached the point where it is now burning up the Fed’s backside, leaving the Fed no room to retreat on the tapering if things go bad and pressing it to even pick up the pace, in spite of the fact that it risks all the more that things do go bad.
“The reality is hotter inflation coupled with a strong economic backdrop could end the Fed’s bond buying program as early as the first quarter of next year,” says Charlie Ripley, senior investment strategist for Allianz Investment Management. “Ultimately, the transitory view on inflation has officially come to an end as Powell’s comments reinforced the notion that elevated prices are likely to persist well into next year. With potential changes in policy on the horizon, market participants should expect additional market volatility in this uncharted territory.”
Well, it’s not exactly uncharted because I’ve been charting this path and saying what the turning points would be (the causes to look for) for more than a year. But, I guess it is uncharted if you don’t read here … or do, but don’t believe me. So, let me tell you for clarification how that chart goes from here:
The Fed will pick up the pace of its tightening. The market will strongly revolt, and the Fed, badly as it wants to slow tapering down to save the market will have its back up to the wall, making that very difficult if not impossible to do because the price tag of that choice is even hotter inflation for longer, forcing much more intense tightening further down the path.
“At this point, COVID does not appear to be the biggest long-term Street fear, although it could have the largest impact if the new (or next) variant turns out to be worse than expected,” Howard Silverblatt, senior index analyst for S&P and Dow Jones indices, said in a note. “That honor goes to inflation, which continues to be fed by supply shortages, labor costs, worker shortages, as well as consumers, who have not pulled back.”
The Fed’s last experience with inflation of this kind when it let inflation run this far out of control back in the seventies was painful for the entire nation for a few years. I can guarantee you the Fed well remembers the incident. Most of them were around back then, so muscle memory will make it hard for them to do their usual reflexive withdrawal of tightening when the market revolts.
Thus, the waters ahead are more treacherous even than the articles above indicate. What they respresent is more like the best-case scenario if all goes well. In this fearful new Covid-plagued world, does that seem likely to you? It does not to me.
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Seeing the Great Recession Before it Hit
My path to writing this blog began as a personal journey. Prior to the start of this so-called “Great Recession,” my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away — and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.