Life at its core is about trade-offs. Even if you could have everything you’ve ever wanted, you cannot have more than twenty-four hours a day. And so everyday, you make trade-offs, consciously and subconsciously. Do I watch another episode or go to bed? Etc etc
For Chairman Powell, it is increasingly looking like a trade-off between saving the global economy or killing inflation. His latest hike took the FFR to 2.25-2.5% with CPI still sitting pretty at 9.1%. In theory, the longer inflation hangs around these levels, we should be talking about a FFR north of 5%. In reality, the effect of such percentage increases would be grave to a global debt/gdp of 351% and a United States public debt/gdp of 125% (private debt = similar #s).
The more likely (and possibly already occurring) outcome is the Fed (and other CBs) targeting a higher long-term inflation rate, say 4%. The Fed would never admit that beforehand but the market will smell it beforehand. 10-year breakevens finished the week up 17bp. If the eco data continues to deteriorate, breakevens should continue climbing, to the benefit of precious metals. This upcoming week, I expect Fed members to be out in full-force, trying to clamp down on the market’s post-Powell reaction, buy the pullback.
Burns and Volcker both had to choose between high unemployment and high inflation. We all know the story of the latter, the former thought “the country was not willing to accept higher rates of unemployment.” When it comes down to it, I believe Chair Powell will feel the same way.
For Chairman Powell, it is increasingly looking like a trade-off between saving the global economy or killing inflation. His latest hike took the FFR to 2.25-2.5% with CPI still sitting pretty at 9.1%. In theory, the longer inflation hangs around these levels, we should be talking about a FFR north of 5%. In reality, the effect of such percentage increases would be grave to a global debt/gdp of 351% and a United States public debt/gdp of 125% (private debt = similar #s).
The more likely (and possibly already occurring) outcome is the Fed (and other CBs) targeting a higher long-term inflation rate, say 4%. The Fed would never admit that beforehand but the market will smell it beforehand. 10-year breakevens finished the week up 17bp. If the eco data continues to deteriorate, breakevens should continue climbing, to the benefit of precious metals. This upcoming week, I expect Fed members to be out in full-force, trying to clamp down on the market’s post-Powell reaction, buy the pullback.
Burns and Volcker both had to choose between high unemployment and high inflation. We all know the story of the latter, the former thought “the country was not willing to accept higher rates of unemployment.” When it comes down to it, I believe Chair Powell will feel the same way.