Kek, what will this achieve? Nothing.
The Masters of The Universe at the Federal Reserve would like us to believe that they have inflation under control and they can solve the problem through a few hikes of the fed funds rate. This is foolhardy and very simply just one example of a problem that they cannot fix will prove this.
If you've traveled by car recently in US of A, you've likely noticed that highest gasoline and diesel prices on record. It looks something like this:
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And the situation is unlikely to improve anytime soon with crude oil prices approaching $120/barrel.
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But high fuel prices are not simply a function of higher crude oil prices. Instead, years of declining refinery capacity combined with useless environmental regulation along with supply chain constraints have combined for a "perfect storm" as it relates to all distillates of crude oil: items such as gasoline, diesel, heating oil and jet fuel.
Keep in mind, that a molecule of crude oil can only be cracked once. So refineries are forced to choose which distillate product to make. And in 2022, a decision to refine more gasoline leads to a shortage of diesel and jet fuel. Conversely, a decision to refine more diesel leads to shortages in gasoline and jet fuel. Do you get the picture?
The United States is on the verge of a MAJOR shipping and logistics crisis. Not only are higher shipping and freight transportation costs driving higher inflation, as trucks get idled, supplies of all products will drop. This will lead to shortages and even higher prices for nearly everything.
So do you see how ineffective a few fed funds rate hikes will be in managing this situation? Years of bad policy and mal-investment in the energy sector has led us to this choke point and the situation is going to get far worse before it gets any better.
Stagflation is already here and it's about to get worse as inflation continues to soar and the economy slows into contraction. From there, The Fed will soon be forced to reverse course and begin cutting rates and adding QE in a desperate attempt to keep the plates spinning. As this occurs, the investment world will again realize (as it did in 2010, 2016 and 2020) that the Monetary Masters at the Fed are the 21st century equivalent of The Emperor With No Clothes.
As this is revealed yet again, gold and silver prices will soar (as they did in 2010, 2016 and 2020).
So for this week, understand first that we are about to experience the most serious energy supply crunch since 1973 and the economic and financial impacts are almost incalculable. From there, understand that no amount of "policy intervention" by the central bankers will be able to fix these problems.
Moreover, Junk bond yields have gone from 4% at the end of Dec (eg 6 mo’s ago) to 8.4% today. That’s their highest level since 2015. Prepare to see an absolute ONSLAUGHT of corp defaults and downgrades. The myth of corp B/S strength is about to be shattered spectacularly.
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Meanwhile, China continues to dump US Treasuries. Their holdings just reached new decade lows.
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What else did the Fed do?
The median dot plot has the fed funds rate at 3.4% by the end of the year which would assume another 175 bps in total at the remaining 4 meetings. With respect to their economic forecasts, they raised their 2022 inflation forecasts (headline by 9 tenths and core by just two tenths) but left their 2023 estimates little changed and the same with 2024 (too far out to be relevant though).
They got more realistic on their unemployment rate forecasts but only barely. They estimate the unemployment rate to be 3.7% this year vs 3.5% in their last forecast and they expect an increase to only 3.9% next year. So the Fed is embarking on the most aggressive hiking cycle in 40 yrs but they estimate barely any impact on the unemployment rate.
As for their estimate for GDP, it went from 2.8% last time to 1.7% now and next year they also expect 1.7% growth. NO central banker will EVER estimate a recession keep in mind.
Bottom line, maybe someone in the press will ask Jay Powell who at the Fed called the WSJ in order to lay the groundwork. After all, Friday’s core CPI was just one tenth more than expected. Either way, everyone is now out hawking themselves on how high the fed funds rate needs to go to in order to tame inflation and we’ve seen the fed funds futures market say 4% and others even say 5-6%. Those that are believing this is possible I don’t believe appreciate how sensitive the US economy and asset prices are to this sharp rise in rates and I’d be fading those guesses all day long.
I also expect the 2s/10s spread to now invert again after the 5s/30s did the other day.
