Are rates restrictive? And if they are – how do you know? That’s the question the Fed will address tomorrow – but it’s not easy to answer. For example, on the one hand there’s a (large) cohort who believe the Fed are falling ‘behind the curve’ – therefore increasing the odds of a recession. They feel that growth risks are to the downside – and do not need to wait for both inflation and employment data to confirm what’s ahead. On the other side of the coin – there are those who think we still run the risk of higher inflation if acting too early.
Fed Reserve
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Are Commodities Telling Us Something?
Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business. Very few get it consistently right (especially policy makers). And whilst macro forecasting is generally a fool’s errand – there are things we can observe to improve our probabilities of success (or at least reduce our risk). Consider inflation… whilst not perfect – there are a set of reasonably strong correlations which exist over extended periods. And it’s these types of correlations we can use to our advantage.As I will demonstrate – over the past 5 decades (after the US dollar removed its peg to gold in 1971) – inflation levels have largely correlated to what we see with commodity prices.
Powell Appeases the Market… Or Does He?
For me, there were two (big) questions for the Powell this week: (1) are rate hikes off the table – given faster-than-expected inflation and continuing economic strength? and (2) when will the Fed commence QT tapering (and by how much)? Powell was unequivocal on possible rate hikes… forghedaboudit. Equities cheered. But why remove optionality? Why Powell is so convinced we don’t see a re-acceleration in inflation? Admittedly it’s a lower probability outcome… but we can’t rule it out. But he apparently can…