Why is inflation rising?
More alarming is the fact that, according to many analysts and members of the Federal Reserve, inflation will continue to rise before falling back to acceptable levels.
The most recent data comes from a study by the Federal Reserve Bank of Cleveland with forecasts of inflation levels in March, as well as a forecast of inflation levels for the first quarter of this year. Their studies indicate that inflation in March could reach 8.41% year-on-year. They also predict that the level of inflation for the first quarter of 2022 could reach 9.1%.
To say the Federal Reserve is behind the curve would be an understatement. The current level of inflation did not start overnight and has been rising steadily since 2020. It is a direct result of two main actions by the administration and the actions of the Federal Reserve.
The administration allocated huge amounts of capital to deal with the economic contraction and recession that was the byproduct of the global pandemic. Trillions of dollars have been allocated to help those in need, and the huge increase in the number of unemployed Americans has resulted from the disruption of businesses during the pandemic. According to “TruthinAccounting.org”, the published national debt of the United States is currently around $30.5 trillion.
However, according to this publication, the national debt in the United States is much higher, with their estimates at $141.461 billion. The graph above visually presents the assets of the United States government as well as its liabilities. He concludes that our true national debt, which was created using data from the US Treasury Department and Social Security and Medicare administrators, is actually $142 trillion.
The second major force that created the current level of inflation was the Federal Reserve’s huge allocation of purchase assets consisting of mortgage-backed securities and US debt. Currently, the Federal Reserve holds more than $9 trillion in assets that it will begin to unwind as part of its current monetary policy tightening plan that will occur alongside rate hikes throughout year round.
What can the Federal Reserve do to reduce inflation?
Although the administration is no longer providing massive capital in terms of aid packages, it is now up to the Federal Reserve to attempt to undo the current level of inflation that has taken years to build. Their first step was to reduce their monthly asset purchases which were completed earlier this year. Their second step was to start raising the Fed Funds interest rate.
The first rate hike came at the last FOMC meeting, raising interest rates by ¼%. The Federal Reserve will likely continue to raise rates at each of the remaining six FOMC meetings this year. The final step for the Federal Reserve will be to reduce the assets on its balance sheet.
Fed Governor Lael Brainard, in a written speech for the Minneapolis Fed discussion, said the Federal Reserve will present a plan “at its May meeting to reduce some of the nearly $9 trillion in assets, primarily treasury bills and mortgage-backed securities, on its balance sheet.” She added that they expect to shrink their balance sheets at a “rapid pace.”
“The [FOMC] We will continue the methodical tightening of monetary policy through a series of interest rate hikes and beginning to reduce the balance sheet at a rapid pace beginning at our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to contract much faster than in the previous recovery, with significantly higher ceilings and a period much shorter to phase in maximum caps compared to 2017-19.
Fundamental analysis of gold
His speech today had a huge impact on financial markets at all levels. In the case of gold price which traded at a high of $1948.90 before the release of a written speech sold off at a rapid pace, taking gold futures to a low of $1920.90. As of 5:30 p.m. EDT, the June 2022 gold futures contract is currently trading at $7.40 and set at $1926.60.
The chart above is a 10-minute candlestick chart that illustrates the pace at which gold sold off immediately after Federal Reserve Governor Lael Brainard’s statement. Lael Brainard, who was seen as a more dovish member of the Federal Reserve, acknowledged that the central bank needed to act quickly and aggressively to bring down inflation.
The problem is that the Federal Reserve waited too long before revising its monetary policy to deal with a multi-year rise in inflation. The more aggressive measures currently planned by the Federal Reserve will almost guarantee that a “soft landing” is virtually impossible.
In other words, the fallout from the Federal Reserve’s aggressive monetary policy tightening will most certainly lead to a contraction in the US economy. Finally, the Federal Reserve cannot undo the current level of inflation that took years to build in a short time, as President Powell said in his last press conference.
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Wishing you as always good exchanges,
Gary S. Wagner