Editorials

Will Jerome Powell chose Inflation or Recession?

Federal Reserve officials expect to hike rates roughly six additional times this year, bringing its benchmark Fed Funds Rate to nearly 2%. In May the central bank raised the Fed Funds Rate by ½%. Can they reach their goal without a recession?

Bill Gross, the PIMCO founder, fears that if the Fed follows through with its plans to hike rate by 25 basis points at each successive meetings this year, it will "crack" the US economy and the housing market, sending the US careening into a recession.  The U.S. economy contracted 1.4% in the first quarter 2022.  If it contracts in the second quarter we will be in a recession.

Societe General market strategist, Albert Edwards, believes the Fed will not be able to raise Funds above 1% without crashing the stock and credit markets.  This is because he believes you must add the reduction of QE to the raising of Fed Funds rates to get a cumulative number.  University of Chicago economists Jing Wu and Fan Xia believe you must add quantitative tightening with an increase in Fed Funds rates to obtain a "Shadow" interest rate, which is flashing red, and indicating the Fed is nearing a peak rate of interest rate hikes before a recession. Investment manager Michael Gentile, believes the market is miss-pricing the number of Fed rate hikes in the next two years.  If the Fed Funds rate goes to 2% the ten year treasury would go to approximately 4%.  With a $30 trillion nation debt, the interest costs would be $1.2 trillion or 35% to 40% of the national budget just for interests costs. That would be unsustainable. 

Michael Gentile and many other financial analysts believe because of an approaching stock market and bond market tantrum Jerome Powell will switch policy. By the 3Q 2022, the Fed will be forced to drop interest rates and restart QE, and monetize the debt.  Economist Peter Schiff believes the Fed is between a rock and a hard place. The central bankers know they need to fight inflation.  But they also know that the entire economy is built on accommodative monetary policy. With $2.3 quadrillion in global debt and derivatives, central banks are trapped.  They cannot win the inflation fight.  Inflation is going to be here for a long time. Many predict 2020's will become a repeat of the 1970's with stagflation, the worst of both worlds,  slow growth and inflation. 
 

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