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In this episode of the “Fed Watch” podcast, I give a great update on news related to central banks around the world. It’s been several weeks since we’ve done an update on the currency world hardware, so there’s a lot to cover. Listen to the episode for my full coverage. Below I summarize headlines related to the Federal Reserve and their upcoming Federal Open Market Committee (FOMC) meeting, Consumer Price Index (CPI) and Inflation Expectations, Dilemma of Europe and the European Central Bank and finally, the horrible economic problems of China.
“Fed Watch” is a podcast for people interested in central banking news and how Bitcoin will integrate or replace certain aspects of the aging financial system. To understand how bitcoin will become global money, we must first understand what is happening now.
Federal Reserve Calendar
Financial headlines were awash with Federal Reserve chairs and governors trying to outdo each other in their calls for rate hikes. the most recent is from St. Louis Fed Chairman James Bullard, calling for a 75 basis point (bps) and up to 3.75% hike in the fed funds rate by the end of the year!
Federal Reserve Chairman Jerome Powell speaks before the Volcker Alliance meeting via pre-recorded remarks and appeared live talk to the IMF on April 21, 2022. (I’ve mixed up the events in the podcast.) I expect a discussion of the global CPI situation in relation to the monetary policies of different countries. We should have gotten a glimpse of Powell’s view of the current global economy in those remarks, more so than the typical, “The economy is growing at a moderate pace” comments we usually get at FOMC press conferences.
The next highly anticipated FOMC meeting is scheduled for May 3-4, 2022. The market says a 50 basis point hike is likely, so anything less than that would be a dovish surprise. So far, the Fed has raised rates only once by 25 basis points, but the onslaught of calls for quick and big rate hikes gave the impression that it had already done so. more.
The Fed’s main policy tool is forward guidance. They want the market to believe the Fed is going to rise so much that they break something. In this way, Fed economists believe they will dampen inflation expectations, which will lead to lower actual inflation. Therefore, all these outrageous calls for an extremely high federal funds rate by the end of the year are meant to shape your expectations, not real prescriptions for monetary policy.
CPI, Inflation Expectations and Yield Curve
The next segment of the podcast is all about inflation expectations. Below are the charts I review with some simplified commentary.
Above we see the CPI year over year. The most recent figure is 8.55%, but in April we enter the year-over-year space of last year’s CPI acceleration. The April 2021 CPI fell from 2.6% in March to 4.1%. This means that we should see a similar price acceleration between March and April, which I don’t think we will get.
And the rest of the inflation expectations indicators below don’t agree that the CPI will continue to deteriorate (for the US).
Consumer CPI expectations from the University of Michigan have effectively been capped below 5%, and with the recession approaching which is expected to recede rapidly, which will appease Fed economists, I would like to add .
The 5-year balance is slightly above historical norms at 3.3%, but it is far from confirming the CPI’s 8%.
Ditto for the 10-year break-even point. It is even lower by historical standards, standing at 2.9%, far from the CPI’s 8%.
One of the most popular inflation expectation indicators is the 5-year and 5-year forecast. It is still below its historical norm, at 2.48%.
All of these metrics are consistent with each other being well below the 8% CPI, added to the flat yield curve with some inversions shown below, and the fragility of the economy brings me to my expect an orderly return of the CPI to its historical norm in the 1-3% range.
Transient has become a meme at this point, but we can see that it’s only been a year of high CPI readings and there are already signs of a CPI spike. Transient simply meant that it was not a decades-long trend change for inflation, but a temporary period of above-average levels. All other measures besides the CPI tell us exactly that.
Europe and the European Central Bank
In this podcast, I also address the deteriorating situation of Europe and the euro. The European Central Bank (ECB) recently announced that it would halt asset purchases in the third quarter of this year to bring inflation under control. Europe’s CPI came in at 7.5%, still below the US. However, their economic situation is much worse than that of the United States.
Europe is in the middle of several crises at the same time, an energy crisis, a debt crisis, a crisis of de-globalization, perhaps a food crisis and a demographic crisis. All this while the ECB eases. What happens when they try to tighten up? Nothing good.
For these reasons, I expect the euro to fall significantly against the dollar and other currencies. Below are several charts I talk about on the podcast for audio listeners.
China’s Growing Problems
The People’s Bank of China (PBOC) has lowered the Reserve Requirement Ratio (RRR) again, effective April 25, 2022. In this segment, I read a Article by FXStreet and provide feedback along the way.
Recent developments in China only reinforce the argument I have been making for years that China is a paper tiger built on credit that is going to frighteningly collapse.
The Chinese have been unable to slow the housing slump or the spread of COVID-19. They have again disastrously resorted to lockdowns in Shanghai and other cities, which will only further cripple their economy. They cannot stimulate demand for loans or lending in this environment, hence the multiple attempts to stimulate lending by lowering the RRR.
What the PBOC will most likely turn to next is compulsory lending. They are desperate to increase credit and prevent the bubble from completely collapsing. It’s reminiscent of Japan in the 1990s, when it imposed loans as part of a similar attempt to stimulate the economy. It didn’t work for Japan and it won’t work for China. At best, China envisions a repeat of the lost decades in Japan.
That’s it for this week. Thank you readers and listeners. If you like this content, SUBSCRIBE, and REVIEW on iTunes, and SHARE!
This is a guest post by Ansel Lindner. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.