Just as in baseball and fight club, the Federal Reserve has certain unwritten rules that members are expected to abide by. There are many. Never saying something that might spook the market. You are to always tout the Fed’s independence from politics. Don’t get caught trading the market. Never talk about inflation being perpetual. However, as the movie the Matrix taught us, “some of these rules can be bent, others can be broken”. Recently, the last rule was broken by the president of the Atlanta Fed, Raphael Bostic.
During a speech at the Peterson Institute of International Economics, he said,
"It is becoming increasingly clear that the feature of this episode that has animated price pressures — mainly the intense and widespread supply chain disruptions — will not be brief"
That is, the price increases caused by supply-chain disruption and the reopening of the economy are likely to last. Last as in longer than transitory. Whoops. That would be news to the chairman of the Fed, Jay Powell. If the above wasn’t enough to spell it out for those in the back of the class, Bostic followed up with,
"Data from multiple sources point to these lasting longer than most initially thought. By this definition, then, the forces are not transitory."
Wow.
“If highly accommodative monetary policy is meant to correct past inflation shortfalls, then we have accomplished that mission. Up to now, indicators do not suggest that long-run inflation expectations are dangerously untethered. But the episodic pressures could grind on long enough to unanchor expectations.”
Double wow. We usually only get this kind of honesty out of Fed members after they’ve retired. Bostic must have seen some data that got him frightened. Could it be the NY Fed’s inflation expectations for September that were posted yesterday?
Inflation expectations are continuing their push higher. This is the eleventh consecutive monthly increase and a new all-time high for the survey which started in 2013.
Or maybe he saw the Consumer Price Index (CPI), before it got published this morning.
Because it continues to stay stubbornly high (5.4%!) for those Fed members (and Wall Street traders) who thought it would be transitory. Even the “core” CPI, which removes energy and food costs, has stayed steady at 4.0%. Bank of America’s CPI heatmap tells the story.
Food and shelter costs have begun a strong move higher. While food can get teased out by using the “core” number, shelter costs cannot. Another thing that stood out to me on the monthly chart, lodging away from home and airfare has seen sharp decreases. This tells me that people aren’t vacationing and business travel isn’t happening. Could people be worried about Covid restrictions at the places they want to visit or could they be strapped for cash since food and energy has gotten expensive? On the yearly chart, it is a sea of green. Energy costs dominate the field, up almost 25% on the year.
A combination of the CPI release and the NY Fed’s inflation expectations survey have seen traders pour into gold and silver this morning. While it’s impressive, I don’t intend on chasing either of these moves. I aim on getting in once I see a sustained move higher. I know this runs counter to what Robert Wenzel taught but I follow the advice of Baron Rothchild.
“I never invest at the bottom and I always sell too soon”
Finally, news came across of a shake-up happening at the Fed. Many are watching closely to see if Fed vice chair Richard Clarida will bow out after the news hit about his stock trading activities. However, Fed vice chairman for Supervision, Randal Quarles, will not be renewed at his post as the Wall Street banks’ supervisor chair. The Fed’s statement went on to say that the Wall Street bank supervision committee will continue to meet on an “unchaired” basis. While Quarles is still a Fed governor, this is most likely a sign that his time left at the Fed is limited. This puts Lael Brainard next in line to the supervisory role. The US President is suppose to nominate a candidate for the role and it would be subject to Senate confirmation. Rumor currently has it that Powell will be renominated as Fed chair and Brainard as vice chair of Wall Street bank supervision. Bank of America has provided a nice graphic on the current slant of Fed governors.
‘Dove’ indicates that they believe in heavy money printing, ‘hawk’ meaning that they lean towards moderate money printing. Those on the ‘dove’ side of the spectrum will be much slower to react to out-of-control inflation than those on the ‘hawk’ side. Recent shake-ups show that the FOMC will lean much more heavily on the ‘dove’ side. Though, Bostic’s recent comments could convince some to adjust their views.