The Federal Reserve is very close to throwing in the towel (again), as it has done a minimal job in reigning in inflation. Its balance sheet remains at 8 Trillion. U.S. Dollar selling could turn into capitulation if all Central Banks begin one by one throwing in the towel. IS the hope on for a milder Northern Hemisphere winter re: peak inflation?
Chairman Jerome Powell has further added to dovish rhetoric by the Federal Reserve and underwriting the market, more so establishing on July 26th 2022 the Powell 'Put'. So, basically what this means, is that the market, which is still trading with expectations of Central Bank backstops, has now priced out inflation by paradoxically adding to inflation, in its selling of U.S. Dollars and buying speculation. Which in turn drives commodity prices, namely oil, back up to their early 2022 ranges when inflation began to spike. A basic equation, but a correct one.
Refer to Chart 1. Showing the oil price futures still bid despite the China COVID mess, on collapsed oil stocks and U.S. Dollar selling + Russia will tighten Nat Gas markets and cut oil production end year = inflationary.
Chart 2. Shows the rally of the S&P 500 after Powell's speech (29/11), which laid out the timeline that the Fed will begin to reduce rate expectations, which was not a pivot per se, but an very clear indication that rates may pause in 2023, as they (Fed) believe that inflation has begun to top out (mild Northern Winter, so far). Bouncing off the Powell Put at 3968, rallying up to over 4080, the market is looking overbought, unless the Powell Put is brought up to 4000. At this point in time more evidence is needed that the Fed have thrown in the towel completely, in their effort to offset imbedded inflation within the American economy.
Chart 3. Is the current Fed balance sheet at 8.6 Trillion ($), which if looked at analytically in lieu of their so called efforts in the tackling inflation, would have shown a greater reduction. Particularly, when the 2020 COVID pandemic caused the Central Bank to create massive emergency lending programs for both government, private (Wall Street) and various companies on main street , which was unprecedented for a Central Bank to allow non banks to borrow directly from their open market operations. Thus, you can see February 2020 (1st red intersect lines) was at 4 Trillion, spiking to 6 Trillion July 2020 (2nd red intersect lines). Reaching high/s of 9Tillion April 2022, when inflation came calling and then, in a very token way, the Fed began reducing their balance sheet. The current balance sheet stands at 8.7 Trillion. Eye watering is it not? But, still very supportive for equities (stock markets) as it has reduced demand to hold U.S. Dollars in the Futures market, on expectations that the USD will offer a lesser return on interest rates. Please refer to the overlay orange line and the blue line, showing a major sell off of the USD (orange line) in tandem with falling 10 YR yields (blue line).
The Fed's other 'tool' to reign in inflation is its ability to Quantitively Tighten (QT) their massive balance sheet, which would thus decrease money supply and restrict credit, more so pushing mortgage and lending rates up, clearly this has not been activated as Chart 3 shows. With both the USD and 10 YR yield spluttering out against the Fed's balance sheet.
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