Last April, the Federal Reserve addressed inflation fears with the word “transitory”. The conversation was directed to the markets to believe that current inflation pressures were not severe, and in fact, would dissipate as people went back to work and the supply chain corrected itself. Many in the markets weren’t so sure that this explanation was valid, but the more the markets pushed back, the more the message persisted that inflation fears were a moot point, as they were just “transitory” and would self-correct. The more that position was shared, the harder the markets pushed back. I have been writing in this post that inflation was real, it was going to get worse, and sooner or later, the FED would have to acknowledge that the inflation pressure was in fact real, and that it wasn’t not only not going away, but was going to be a significant issue going into 2022.
This week Jerome Powell finally addressed the issue again but fell far short of admitting he was wrong, but rather the markets had a different definition of the word transitory than the FED did, so he was going to eliminate the word from use and just move on. He did admit that inflation was very real and that it would continue to be an issue well into 2022. With tapering already under way, the possibility of the FED speeding up the tapering timetable seems likely to take place. Since the FED isn’t completely transparent with its balance sheet, we can only see that data that they share, but it is likely that the markets will adjust to the fact that the FED sees that inflation is real, and that is the first step in dealing with the issue.
Big picture is that rates will continue being volatile while trending higher. The jobs report tomorrow will help set the stage for market reaction. We all must pay special attention to unit labor costs and productivity next Tuesday, as well as the CPI report next Friday 12/10. All of this is to say, please don’t play the market, if you like it, LOCK IT!
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