CPI and Market Expectations
I’m not going to make friends after today, but I have to say this.
The Federal Reserve is an institution that must test the limits or it has no idea where the economy’s weak points are.
After last week, they know for sure.
From the perspective of the bystander, it looks like the FED has failed, but from Powell’s point of view, he now knows exactly what the situation is for the banking sector, and everyone’s on high alert.
The government and the central bank are both sleeping with one eye open, and that’s usually when the FED flip-flops and eases up on its dovish stance.
It needs to “buy time” and allow the system to remain solvent and functioning, but it can’t completely abandon its commitment to squash inflation, which isn’t letting up yet.
This is a classic case of the FED compromising on its mission to reduce inflation because the risk is that it sends the system into panic at the deepest levels in what we call a credit event.
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Unless the entire world is mistaken, the FED will raise rates by 0.25% one week from now, reaching 4.75% on the FED Funds Rate, but the data that will come in from the real economy will prove to be very concerning.
Construction will sound the alarm, wages will fall, and layoffs will persist, but the FED will keep on fighting inflation in May.
In that meeting, the FED will probably announce the final 0.25% hike. This would put the terminal rate at 5.00%, which would have seemed not only impossible but from a parallel universe just two years ago when this very same guy named Jerome Powell thought inflation was a passing fad and a temporary hiccup.
The market is definitively seeing rate cuts in either the June meeting or the July meeting, and by the end of the year, we are expecting to be at 4.00% or 4.25% maximum.
If that’s the case, the market is strongly considering that the signs of recession will appear in the data by late May.
What the FED is seeing is that they’ve done enough for now and consumers no longer think inflation is an acute emergency.
Between plummeting energy prices and housing prices falling faster than in the first months of 2005 after they peaked last time, America is not panicking over inflation, and that means that the first step in this crisis has been accomplished.
Inflationary expectations that drive behavior are clearly diving (a good sign).
Their next challenge is to make damn sure that they didn’t overdo it, and if they are able to soften the landing, we still have historically high inflation in this country and around the globe. While we aren’t back to square one, we must admit inflation is not trending to 2% like the FED is asking the universe to.
If the FED is loosening and cutting, the dollar’s competitive strength over other currencies shrinks, and that’s why I like my odds with silver starting in May and June.
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