From Growth to Inflation... Why the Fed Changed Direction

 

Omnicron's Effect

When Omicron first came out, I took a long sigh.

As vaccine dissemination begins, more than 70% of the United States will be vaccinated by July of next year, and the resulting strong immunity will lead to a retreat from Corona. There was a lot of hope mixed with hope.

Current Condition going on

Right now, I am in the middle of a dark tunnel, but I am full of hope that I can see a light in the distance.

Omicron exploded at the moment when Weed Corona was about to start... I don't think it's a matter of losing the pulse.

There is a saying that the economy is psychology. Depending on the sentiments of economic actors, the market flow tends to steer in that direction in the future.

Recently, there has been talk of a rate hike in the US.

No... It seems that the tapering started yesterday, so why is there a sudden talk of a rate hike? you may be thinking.

I told you tapering is not austerity

Tapering is paying less money than it used to be...

This will be the talk. The process of giving but giving little by little… Controlling the speed with the accelerator is called tapering.

And when the tapering is over... In other words, the money released from the market will be recovered once the money cycle is at zero, and from that point on.

The recovery process is an interest rate hike. Interest rate hikes... You hit the brake on its own.

If the tapering gives less, and if the interest rate hike is to recover the money, then the interest rate hike is a much more burdensome event for the financial market.

Rate Hike

Now... there's more to a rate hike than what it is. Why is the Fed in such a hurry?

With the start of tapering in November,We are supplying $105 billion, a decrease of $15 billion, and in December, we are supplying $90 billion, a further decrease of $15 billion.

So the calculation is simple, right?

Around June next year,That's $15 billion every month... We could reduce the remaining $90 billion in six months to zero. Quantitative easing is officially over.

Relating to this

Despite the declaration that it will reduce by $15 billion every month, after only about a month, they are saying that they will increase the speed of the tapering even more.

Yes… Instead of reducing it by $15 billion per month, you can cut it by $30 billion.Then the tapering program could end not in June of next year, but in March of next year earlier.So why rush tapering?.

Yes… You should look at the events beyond the tapering.

Once the tapering is over, you can start raising interest rates from then on.Even earlier this year, Chairman Powell's comments gave me the nuance that a rate hike was likely to happen around early 2024.

Alongside this, it seems that the first-rate hike is possible at the end of next year, just over two months ago...Now, I see the possibility of raising interest rates once in the first and second half of next year, that is, two times each.

Fed's Changes

Why is the Fed making this change?

The Fed has two goals.

Full employment and price stability.

If full employment is easily expressed in terms of growth, it can be said to be the maximization of growth.

Then, maximizing growth and stabilizing prices… These two things are key.

Growth and prices are originally in the same direction.

When growth is strong, prices rise, and when growth slows, people's incomes decrease, which reduces demand for products and causes prices to fall.

Yes, growth and prices move in the same direction.

In this case, the Fed is not in a dilemma.

If growth and inflation are both sluggish, you can simply release money. Then, growth will be stimulated.And prices that have fallen will be able to return to a stable level as demand increases along with growth.

Growth Problem

But...

I have this problem. Growth is slowing, but prices are rising.

So what can the Fed do?

In terms of growth, interest rates should be lowered, and in terms of inflation, interest rates should be raised.

In the first half of last year, the Fed made this diagnosis.

The current strong inflation trend is one! time! time! It's a temporary rise in prices, so it shouldn't be a big problem.

By the way... About three months ago, the words started to change. There is talk of a little bit of a temporary (?)

It's 'a a little long because it's a good word... The current high inflation could continue into next year.

Wow, this isn't temporary.

So, if the Fed has withdrawn from the view that it is temporary, inflation can no longer be ignored.

Strategy:

So what strategy should you use?

Two contradictory goals cannot be addressed at once. Then, the best strategy would be to select one side to quickly suppress it and concentrate the front lines on the other side.

Which one is better?

Imagine taking slow growth and boosting it.

By the way, the low growth since the financial crisis has continued for more than 10 years like a real high disease.

It's not easy to pull this up.

There is a very high possibility that it will become real long-term trench warfare even if it goes into a decent amount of power.

If there is a long-term war here, it will be like giving the enemy enough time to make the enemy of inflation much stronger behind the scenes.

And there's not much firepower available.

To support growth, we need to release more money, but it is not easy to increase support more strongly when quantitative easing is already at zero interest rates.

Then you look at the opposite side of the price.

Of course, I'm not a friendly opponent, but... Long-term trench warfare is about to rise rather than fighting the obvious growth… It would be better to keep prices down.

And there are plenty of bullets to keep prices down.

Many rates can be increased. from zero interest rates

And there is space for interest rates whenever the rates are lifted, which can be reduced to promote future growth.

Yes… There will be a perception that it will be easy. Then, if you focus on one side... Of course, it would be right to suppress inflation.

The effects of strong economic stimulus measures are in effect.

Although much smaller than initially expected, the effect of the US infrastructure and welfare bill-related stimulus money is also somewhat promising.

Future Prediction

Growth in the first half of next year is not likely to be very disappointing, so we have spared time for the slowdown part, so we can focus on inflation for now.

Yep, that's why you can see the focus on the waterfront and a strong push.

This would be a slightly stronger and faster stance than the market's expectation, Perhaps this will continue until the expectations for inflation are dampened...I think like that.

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