from Arcadia Economics
Breitbart Business Digest: The Era of Fed Cuts is Over
by John Carney
Breitbart.com
The Fed’s Been Wrong About the Economy for Years
The Federal Reserve’s rate-cutting cycle has very likely come to an end—although it may take Fed officials several months to figure this out.
The Fed last hiked its overnight benchmark way back in July of 2023, when it raised the federal funds target to a range of 5.25 percent to 5.50 percent. At the time, the Fed was convinced that this level of interest rates would weigh heavily on economic growth, bringing the economy close to a recession or at least a long period of sluggish growth.
The summary of economic projections (SEP) released at the prior Fed meeting in June of 2023 showed that officials expected the economy to grow just one percent in 2023 and 1.1 percent in 2024. By 2025, growth was expected to creep up to 1.8 percent, which also happens to be the Fed’s long-run estimate of growth for the U.S. economy.
Inflation Worries to Dog the Fed and Crimp Trump’s Economic Agenda
The rise in bond yields at a time when the central bank is lowering interest rates could test the economy, the markets and Donald Trump’s agenda.
by Tim Smart
USNews.com
Last week provided almost a near trifecta of economic news that showed the economy strong but also with a strength that is unnerving markets.
That may well be the case again this week as a different version of the dynamic comes into play.
First, a review of last week’s good-news-is-bad-news story:
— A December jobs report from the Labor Department that beat expectations handily as 256,000 jobs were created, way above the 160,000 expected.
The Inflation Gamble
New research reveals that as inflation diminished spending power, many individual investors turned to risky investment behaviors to ease the pinch.
by Michael R. Malone
University of Miami
Traditional economic theory would indicate that individual investors should trend conservative and reduce their risks during times of high inflation, such as the extreme period that lingered globally in the wake of the pandemic.
Yet new research by Alok Kumar, Gabelli Asset Management Chair and finance professor in the University of Miami Patti and Allan Herbert Business School, reveal a contradictory trend—one with surprising and potentially disruptive implications for the economy.
“What we’re seeing in financial markets is not inflation hedging but pure speculation and gambling as people are trying to compensate for the potential loss in purchasing power,” Kumar said. “People don’t generally think—and traditional finance and economic theory doesn’t perceive—that gambling is going to affect prices. But the observed impact of this gambling channel is so strong that prices can move up and down.”
What to Expect From Wednesday’s Inflation Report
Inflation likely rose in December, indicating that progress against price increases has stalled, forecasters said.
by Diccon Hyatt
Investopedia
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Everyone’s least favorite economic phenomenon likely continued its comeback in December if forecasters are correct.
A report Wednesday from the Bureau of Labor Statistics is likely to show the Consumer Price Index, a measure of the cost of living, rose 2.9% over the 12 months ending in December, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. This would be the third month in a row the key inflation gauge has risen, bringing it to its highest since July.
Economists tracking consumer prices said rising costs for food and energy likely pushed the CPI higher. That could be a sign that progress against inflation earlier last year—thanks to the Covid-related supply chain snarls unraveling—remains stalled.
Inflation Expectations Surge, Pulling Down Consumer Sentiment, Casting Doubt On Fed Policy
by John Carney
Breitbart.com
Inflation expectations among American consumers surged in January, according to the latest University of Michigan survey, casting doubt on the Federal Reserve’s decision to cut interest rates three times late last year. The findings suggest that while consumers feel marginally better about their personal finances, concerns about rising prices in the months ahead have intensified.
“Assessments of personal finances improved about 5 percent, while the economic outlook fell back 7 percent for the short run and 5 percent for the long run,” said Joanne Hsu, director of the Surveys of Consumers. “January’s divergence in views of the present and the future reflects easing concerns over the current cost of living this month, but surging worries over the future path of inflation.”
Most Fed Officials Were Worried About Higher Inflation, but Not Enough to Put Rate Hikes On the Table, Minutes of December Meeting Show
Almost all officials saw chance that inflation would stay higher than desired, in part due to Trump policy plans
by Greg Robb
Market Watch
“Almost all” Fed officials judged that the upside risks to inflation had increased, the minutes said.
This was due, in part, to potential changes in trade and immigration policy under consideration by the incoming Trump administration.
All of this led to a careful and cautious approach — but not hikes.
If inflation remained elevated, many Fed officials said the central bank could hold the policy rate steady or ease more slowly. There was no mention of rate hikes.
Inflation Expectations Will Keep Rising in 2025, and it Matters Most in Japan
from Zero Hedge
By Dhaval Joshi, chief strategist at BCA Research
Executive Summary
- In the developed economies excluding Japan, rising inflation expectations will lift them further above the 2 percent target. This will limit the scope for further interest rate cuts.
- But in Japan, rising inflation expectations will lift them up to the BoJ’s 2 percent target. This will remove the BoJ’s justification for its decades-long zero interest rate policy (ZIRP).
- The normalisation of Japan’s monetary policy poses a big risk to stocks because Japan has been the main source of financial market liquidity, and thereby, of rising stock market valuations.
- Hence, the biggest risk to US tech valuations comes from a rise in the Japanese real bond yield.
- On a structural (1-2 year) time horizon though, it is highly likely that Japanese real yields will rise, causing a meaningful setback in stocks versus bonds, and especially the US superstar stocks.
- But from a timing perspective, wait until the complexities of the price trends in USD/JPY and/or Nasdaq versus 30-year T-bond have reached the point of collapse that signalled previous reversals at the end of 2023 and the summer of 2024. You can monitor these indicators on our website.
- Go tactically long copper.
2024’s political Zeitgeist was encapsulated in what I have called the ‘3 I’s’: Incumbents punished for Inflation and Immigration.
Gold Gains as Traders Seek Haven Amid Tariff, Inflation Worries
by Yvonne Yue Li
BNN Bloomberg
(Bloomberg) — Gold advanced as traders sought safety in the precious metal amid concerns over tariffs and inflation, even as a strong US jobs report supported the case for a pause in Federal Reserve interest-rate cuts.
US hiring accelerated in December and the unemployment rate unexpectedly fell, capping another year of resilience in the jobs market, a Bureau of Labor Statistics report showed Friday. The print reaffirmed policymakers’ view that the US central bank will adopt a more cautious approach to lower borrowing costs amid a still-healthy labor market and sticky inflation.
Swap traders have now shifted their expectations for the Fed’s next rate cut to the second half of the year, and 30-year Treasury yield rose above 5% for the first time for the first time in more than a year.
Vast Devaluation of Dollar Coming in 2025 – Craig Hemke
by Greg Hunter
USA Watchdog
Financial writer, market analyst and precious metals expert Craig Hemke predicted at the beginning of 2024 that the US National Debt would tack on another $2 trillion to the $34 trillion that was already there. The federal debt now stands at $36.3 trillion. Hemke was correct, and now he’s back with his 2025 predictions. Let’s start with where interest rates, they have already gone up dramatically in the last year. Hemke says, “If the economy really is sliding into recession, and they can’t get the budget under control, because of the liquidity that is going to be needed to control interest rates, the fed will be talking openly about yield curve control.”
Isn’t “yield curve control” just another term for printing massive amounts of money to buy the debt? Hemke says, “Yes, exactly. The money has to come from somewhere, right? If they are buying government debt because that’s what they are doing. They are the buyer of last resort to keep those yields down. So, where’s the money coming from? They are the ones creating it. This is a vast devaluation of the currency (US dollar). This is money creation, dollar creation that gets flushed into the economy . . . . This is just like what happened after covid. It continues this inflation against the little guy, you and me and everybody else that has to take their dollars and go buy things. This is where it becomes an untenable situation.”
UMich Inflation Expectations Soar to Highest Since 2008 as Democrats Confidence Slumps
from Zero Hedge
After ‘current conditions’ surged higher in December – on Trump optimism – analysts expected confidence to remain high in preliminary January sentiment data from UMich.
But the data was mixed with Current Conditions soaring further (highest since April) while expectations dropped (lowest since July), dragging the headline down modestly…
[…] Democrats continue to get more depressed as Republicans’ sentiment continues to rise…
[…] Most problematically, inflation expectations soared with the 5-10Y horizon surging to its highest since 2008…