The two important headlines I saw today both came from Our Dear Leader Powell. In his testimony today, Chairman Powell declared that “It is time to retire the word transitory regarding inflation”, and “the threat of persistently higher inflation has grown.” Finally, he added that the Fed “can consider wrapping up the taper a few months sooner.”
The fact that inflation is here is no shock to the average American, but to hear it come out of the Fed Chairman’s mouth was a bit shocking today. Also, the idea of speeding up the taper has not been priced into markets. I believe soon we’ll be hearing Chairman Powell begin to broach the topic of raising interest rates sooner than expected as well.
So, what does this mean for markets going forward, and are we at a key turning point? If the Fed is now moving to a stance of acknowledging a persistent inflation problem, logic would dictate that a policy response would follow.
Over the past decade, inflation caused by the Fed’s QE has largely been contained to the stock and bond markets. An unprecedented expansion in the Federal Reserve’s balance sheet gave rise to one of the greatest bull markets in our nation’s history. At the same time, U.S. consumers largely enjoyed a decade of commodity and product deflation. This can be seen in the decade long bear markets of many commodities, as well as cheap goods flowing into the U.S. from China and overseas. I believe those two flows are in the process of reversing. The next decade will likely be marked by multiple bear markets in stocks, as well as a continued bull market in commodities.
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