Hello Trader,
The Fed is between a rock and a hard place. The Fed, legally, has two mandates and they sometimes conflict:
- Keep unemployment low
- Keep inflation under control
That's what the law says but last year they added climate change to their mandates! Sorry, Jay, not in the law! Don't go rogue! So let's just focus on their legal mandates.
Employment
Right now, the unemployment rate is pretty low at 5.4%. That was considered full employment until the latter part of the Trump administration when unemployment moved to below 4%. So that has set a benchmark for the Fed to try to get unemployment below 4%. So the 5.4% rate suggests that the Fed will keep monetary policy easy.
In addition, Initial unemployment claims are actually increasing again! These are people who are applying for unemployment benefits for the first time. The rise over the last few months is very low but the Fed interprets this as a slack employment situation. So even as the unemployment rate is coming down, the Fed looks at claims and sees there are lots of people looking for jobs so keep easing!
Inflation
It is the sharp rise in inflation that the Fed is looking at that prompted them to tighten reserves. The chart shows PCE Chain inflation indexes. The PCE stands for Personal Consumption Expenditures or consumer spending. They look at the one that takes out food and energy. This has skyrocketed from about .5% to about 4% in just a few months!
They are saying it is transitory but their actions say otherwise. They are now tightening reserves as a hedge against higher inflation.
So, net net, they are easing and tightening at the same time!
They seem to be hedging and waiting to see how things go before committing to a full blown tightening program or going back to a full blown easing program.
We are now in a period of stagflation. Stagnant economy and inflation combined! Ugh!
So, near term, the Fed will do nothing new.
The stagflation combined with Powell wanting to keep his job suggests that they will lean toward a loose policy in the future. They will keep trying to tighten but then a new week economic or employment number will come out or a strong inflation number will come out and they will back off from doing the tightening. They will jawbone or talk about talking about or even talk about tightening like this last week. But they will mainly flinch and back off.
Tomorrow, I'll talk about fiscal policy. I'm going to shock you with one of my conclusions!
Good Fed trading,
Courtney Smith
P. S. Our unique and stunning How to Make Money In A Bear Market course is on sale right now and only for this week at half price!
Click here to learn more! But this half price deal ends at midnight Friday. Use promo code B34R to cut the price in half!
P.P.S. Here is what one student said about the course: Courtney Smith always provides the BEST teaching materials hands down. No matter what course it is you are sure to get incredible insights you won't get anywhere else in the world! Courtney Smith has changed my life forever in the most amazing way! Brandon, Lancaster, SC.
No comments:
Post a Comment