The vicious economic cycle continues

The fact that the Federal Reserve left interest rates unchanged, in the range of 5.25% – 5.5%, was of no concern to US stocks.

On the other hand, he continues, the promise not to reduce them and to continue monetary tightening exerted downward pressure on bond yields, with the yield of the 2nd falling by up to 10 bp. and of the 10-year-old by 11bp.

At the same time, the dollar index fell below 105.5, with the yen registering sharp movements. Of course, in this environment, surely, some were hurt…

Insufficient progress

According to Federal Reserve Chairman Jerome Powell, the US is not making enough progress in taming inflationary pressures.

1. The 2% inflation target appears to be slipping away, so the FOMC will keep rates at 5.5% “for a longer period of time.” On the other hand, the Fed appears to be loosening up anyway, reducing QT, or bond sales, more than expected: from $60 billion to $25 billion per month. Sure, it’s not QE, but it’s a $35 billion step toward the long-held argument that it can have high interest rates and QE at the same time.

2. Powell played down the case for rising inflation – Powell made it clear that the risk of rate hikes is low: With that weapon, yields fell and stocks rallied, if only briefly.

3. If inflation is higher and nominal interest rates stay the same, as suggested, then we will see a lower real interest rate, at a time when economic conditions are objectively loose, not tight.

According to the Fed, nominal wage growth was 4.7% in March, while the rate of workers changing jobs was 5.2%.

According to ADP’s report, people who change jobs received a 9.3% annual salary increase compared to 5.0% for those who stay.

In effect, we are still dealing with a slowing wage-price spiral, with the feedback between prices and nominal wages slowing the fall in inflation.

Even worse, there will be cuts not because of inflation, but because of rising unemployment.

So Powell will see the “deer,” not the “puff.” If the markets don’t like that, and they shouldn’t, then they’ll hold on to their pearls, pointing out that Powell has a personal incentive to cut rates before Election Day since Trump isn’t going to extend his term as president. of the Fed.

It is noted that his base scenario remains a Trump victory and an inflationary universal tariff in 2025 that stops the Fed’s cut cycle.

Meanwhile, we saw more intervention in the yen and market talk about how disastrous it would be if the yuan followed the yen lower. However, even as Jay Powell tries to please the White House, US markets and the publisher of his inevitable autobiography, this only increases the flow of global capital into the dollar and other US assets.

Those with memories rightly detect disturbing echoes of past periods of extreme systemic stress and global instability in this setup. But the Fed will always do what the Fed does, no matter what, as it always does, especially now that we’re in an election year.

Geopolitics

This atmosphere is accompanied, of course, by changes in geopolitics. The Houthis have not boasted that they are capable of hitting ships as far as the Indian Ocean.

  • This means that the ships will go around Africa.
  • This will mean higher premiums and reasonably higher fares, thus higher inflation.
  • Even worse, there may be interruptions and disruptions to all cargo flows from Asia to Europe and back again.
  • At the same time, Congress is promoting a ban on imports of Russian uranium.
  • US graphite miners are pushing for tariffs on Chinese exports.
  • Meanwhile, the US, along with Australia and Japan, has announced that it is going to work with the Philippines to curb China’s dominance in this industry.
  • Ukraine continues to lose key ground and is striking Russian oil refineries in response, while Russia is striking Ukrainian gas and electricity facilities.

In the Middle East, we wait to hear whether Hamas will accept the latest ceasefire deal for the hostages.

  • However, the risks are clear: Hamas could leave, Israel could enter Rafah, and Hezbollah and Israel could… stumble into war.
  • Indeed, Hezbollah is rumored to have secretly moved hundreds of family members of key officers out of Lebanon, portending a geopolitical storm.
  • The question also remains whether Saudi Arabia wants to help Trump campaign to bring peace to the Middle East.

If anything, in this environment, fragmentation of trade flows is out of the question… as is a 0.25% cut by the ECB and Fed.

About the author

The Liberal Globe is an independent online magazine that provides carefully selected varieties of stories. Our authoritative insight opinions, analyses, researches are reflected in the sections which are both thematic and geographical. We do not attach ourselves to any political party. Our political agenda is liberal in the classical sense. We continue to advocate bold policies in favour of individual freedoms, even if that means we must oppose the will and the majority view, even if these positions that we express may be unpleasant and unbearable for the majority.

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