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In this episode of the Fed Watch podcast, I give a major update on central bank-related news from around the world. It’s been several weeks since we did a shabby update on material from the money world, so there’s a lot to report. Listen to the episode for my full coverage. Below I summarize the Federal Reserve headlines and its upcoming Federal Open Market Committee (FOMC) meeting, the Consumer Price Index (CPI) and inflation expectations, the Europe and European Central Bank dilemma, and finally China’s dire economic woes.
Fed Watch is a podcast for people interested in current central bank events and how Bitcoin will integrate or replace 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
The financial headlines were awash with Federal Reserve Presidents and Governors trying to outdo each other in calls for rate hikes. The latest comes from St. Louis Fed President James Bullard calling for a 75 basis point (bps) hike and up to 3.75% to the Fed’s interest rate by the end of the year!
Federal Reserve Chair Jerome Powell speaks via pre-recorded remarks ahead of the Volcker Alliance meeting and appeared live to speak with the IMF on April 21, 2022. (I muddled the events in the podcast.) I expect a discussion on global CPI situation in relation to monetary policy of different countries. We should have gotten a glimpse of Powell’s perspective on the current global economy in these remarks, rather than the typical vanilla “economy is expanding at a moderate pace” comments we usually hear at FOMC press conferences.
The highly anticipated next FOMC meeting is scheduled for May 3-4, 2022. The market says a 50 basis point hike is likely, so anything below would be a cautious surprise. To date, the Fed has only raised rates once by 25 basis points, but the onslaught of calls for quick and big rate hikes has made it seem like they’ve already done more.
The Fed’s most important policy tool is forward guidance. They want the market to believe that the Fed will go up so much that they will break something. In doing so, Fed economists believe they will dampen inflation expectations and result in lower actual inflation. So all of these outrageous calls for the Fed to have an extremely high interest rate by the end of the year are meant to shape your expectations, not the actual prescriptions for monetary policy.
CPI, inflation expectations and yield curve
The next segment of the podcast is all about inflation expectations. Below are the diagrams I’m going through with some simplified comments.
Above we see the CPI year-on-year. The most recent figure is 8.55%, but in April we are entering the area of last year’s annual acceleration in CPI. April 2021 CPI rose to 4.1% from 2.6% in March. That means that between March and April we’re going to see a similar acceleration in prices, which I don’t think we’re going to get.
And the rest of the inflation expectation metrics below are inconsistent with the CPI (for the US) deteriorating further.
The University of Michigan consumer CPI expectations have effectively been capped below 5% and as we approach a recession which should move down quickly, I would add that this will appease Fed economists.
The 5-year breakeven is slightly above historical norms at 3.3%, but is far from confirming the 8% of the CPI.
The same applies to the 10-year breakeven. It’s even less above historical norms at 2.9%, a far cry from the 8% CPI.
One of the most respected inflation expectations is the 5-year 5-year forward. At 2.48%, it is still below its historical norm.
All of these measures are consistent with being well below the 8% CPI added to the flat yield curve with some inversions shown below and the wobble of the economy makes me expect an orderly return for CPI to its historical norm in year 1 -3% range.
Transitory has become a meme at this point, but we can see that it has only been a year of elevated CPI readings and there are already signs of spikes in CPI. Temporary simply meant that this was not a multi-decade reversal for inflation, but a temporary period of above-average levels. Every other metric besides CPI tells us exactly that.
Europe and the European Central Bank
In this podcast I also report on the deteriorating situation for Europe and the euro. The European Central Bank (ECB) recently announced that it will halt asset purchases in the third quarter of this year to bring inflation under control. Europe’s consumer price index is 7.5%, still below that of the US. However, their economic situation is much worse than that of the USA
Europe is in the middle of many different crises at the same time, an energy crisis, a debt crisis, a deglobalization crisis, maybe a food crisis and a demographic crisis. All while the ECB is easing. What happens when they try to get tight? Nothing good.
For these reasons, I expect the euro to depreciate significantly against the dollar and other currencies. Below are some charts I talk about in the podcast for the audio listeners.
China’s growing problems
The People’s Bank of China (PBOC) has again reduced the Reserve Requirement Ratio (RRR) effective April 25, 2022. In this section I read and commented on an article by FXStreet.
Recent developments in China only reinforce the arguments I have been making for years that China is a paper tiger built on credit and will collapse in a frightening way.
The Chinese failed to slow the real estate collapse or the spread of COVID-19. They again resorted to disastrous lockdowns in Shanghai and other cities, which will only further cripple their economies. They cannot stimulate credit demand or lending in this environment, hence the numerous attempts to stimulate lending by lowering the RRR.
What the PBOC will most likely turn to next is ordering loans. They are desperate to increase lending and keep the bubble from fully collapsing. This is reminiscent of Japan in the 1990s, when it ordered loans in a similar attempt to stimulate the economy. It didn’t work for Japan and it won’t work for China. At best, China sees a repeat of the lost decades in Japan.
That’s enough for this week. Thanks to the readers and listeners. If you like this content, please SUBSCRIBE and REVIEW on iTunes and SHARE!
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China lowers RRR
This is a guest post by Ansel Lindner. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.