“The Fed’s plan to let inflation run Hot will change the way the market functions and how to invest in it” — Paul Ebeling
The Feds plan to let inflation run Hot could shake up decades-long regimes in markets and the economy. As higher inflation always lifts the price of things, cyclical assets, hammer Treasury’s and high-grade corporate bonds.
A period of steadily high inflation and strong growth could very well replace the past decade’s weak US economic expansion.
Fed Chairman Powell’s dovishness has investors bracing for inflation in the early Biden era. How the Fed guides the economy will decide whether markets are in the midst of their own change or if investors can reuse their pre-VirusCasedemic playbooks. What we at HeffX-LTN see the beginning of a New Era in financial markets.
Last August the Fed augmented a new policy framework that targets inflation temporarily above 2% and maximum employment. Chairman Powell’s comments since then signal the Fed’s extremely easy monetary policy will stay in place well after the economy reopens and at least through Y 2023.
The guidance marks a stark shift from the recovery following the global financial crisis. The initial bounce out of the Great Recession quickly gave way to secular stagnation: secular stagnation describe a frame of weak growth and low inflation.
The Fed’s new strategy take it lessons from the last recovery and run the economy Hot, bucking the decades-long precedent that explicitly links price growth with hiring.
“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” Chairman Powell said in his Wednesday press conference last Wednesday. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”
Over the yrs I have learned that recession recoveries have similar market dynamics in the early stages. Investors sell defensive assets like Treasury’s and growth stocks and move their cash into risk on issues that augur stronger economic growth lift their value.
Those trades have largely played out in this recovery
Recently, Treasury yields, as we have seen, spiked to their highest marks in more than a yr as investors positioned for stronger inflation. Tech stocks declined through February, and sectors that lagged through the VirusCasedemic outperformed.
Nevertheless, the tech sell-offs have been followed by dip-buying as traders moved their focus from inflation concerns to reopening optimism. The benchmark 10-yr Treasury yield continues to climb, but slower than seen early in March. Markets look to be at a crossroad, waiting to see how strong the recovery will be.
Aggressive government fiscal stimulus and the Fed maintaining its easy money policy stand to change the market leadership. That combination can supercharge economic growth and inflation to marks unseen since Jimmy Carter’s presidency.
Have a healthy week, Keep the Faith!