With the recent rise in inflation expectations and agitated bond markets, investors had been hoping for any signs of action from the Fed to calm the markets and control inflation.
But in a speech last Thursday, Jerome Powell, Fed Chairman, took a rather dovish stance, sending markets into a sell-off with the Dow and S&P 500 finishing down and the Nasdaq erasing its gains for the year, and sending the 10-year US government bond yield as high as 1.6% in the process.
While Powell admitted he was planning on the reopening of the economy to trigger a rise in inflation, he still saw it as a temporary rise.
The Fed Chairman added that he would wait for “disorderly conditions” on the markets and US bonds yields before he would take any real action.
Not much to alleviate fears that the Fed is moving too slow to counter what’s perceived as a very real rise in inflation expectations.
If you have been reading our newsletter (or the news), you know there is a good case to be made for rising inflation in the short to medium term. Rising commodities prices being a strong indicator for coming inflation (SPOTLIGHT #74, #72, #63), extreme money-printing being another one (SPOTLIGHT #75, #67).
Couple that with the new $1.9 trillion stimulus package that has recently been voted by the U.S Senate, along with ever-expanding deficits in most developed countries, and the scales seem to be slowly tipping in favor of higher inflation in the near future.
If sustained inflation does take hold, it will be interesting to see if the current 10-month low buying price for gold will push investors towards a new gold rally.