"REFLATION TRADE IS BACK ON, VIA THE MARKET PRICING OUT A 1.00% HIKE FROM THE FED AND A RECESSION. SO IS IT STAGFLATION AND A HIRING BOOM COLLAPSE? A $100 OIL PRICE WILL CRIMP ANY MAJOR RALLIES".

 

Chart 1

Chart 2

The Federal Reserve has essentially thrown in the towel in its inflation fight.   The market consensus, which I agree, was always going to be 0.75% rate hike, to combat imbedded inflation in the American economy.  A 1% would have been wiser to show a commitment and retain credibility as a Central Bank to stabilize prices, not speculation, they have done the opposite, more alarmingly Fed chairman Jerome Powell with his speech after the 75 basis point hike, was a flip flop of denial and acceptance of inflation, mixing words like "softening" of the labor market to "Households are in very strong shape" and "That's not to say, lower income households are not suffering."  But, the market priced in a reflation rally as soon as Powell said this, "TIME TO GO TO A MEETING BY MEETING BASIS, NOT PROVIDE CLEAR GUIDE AS BEFORE".  Which, in not so many words, means that they have either don't want to deal with inflation and/or hope that somehow it will stabilize with out reducing their balance sheet and lifting rates over 3%, which will probably end up being the worst in American history.  Yes, climate change/war/pandemics will contiue to drive prices higher.   

Please refer to Chart 1, with indices rallying on the Fed's speculation stability via dovish rhetoric and 2.50% interest rate.  Note also the Fed's balance sheet at close to 9 Trillion.

Also, refer to my post: 

"REFLATION TRADE IS BACK ON, VIA THE MARKET PRICING OUT A 1.00% HIKE FROM THE FED AND A RECESSION. SO IS IT STAGFLATION AND A HIRING BOOM COLLAPSE? A $100 OIL PRICE WILL CRIMP ANY MAJOR RALLIES".  

If the Fed sits pat and waits for a higher CPI, which is ridicules logic, when the oil price, after Powell's speech rebounded from its $95 support, rallying three dollars to $98 (Chart 2). It would be then, all eyes on the Fed's 10-yr breakeven rate and its correlation with food/oil/gas/electricity price to see if inflation is so entrenched, that an emergency hike maybe on the table.  Energy inflation will crimp market rallies as companies begin to feel the post Covid-19 fiscal/monetary stimulus wearing off dramatically going into the next 6mths.  Central Banks denying inflation earler and now are denying stagflation/recession, maybe indicative that they're lost the plot altogether.

Maybe the dice has been rolled too many times.