What Is The Bond Market Saying About Inflation?

Chairman Powell surprised the market in his testimony before Congress when he decided to eliminate “transitory” from being used with “inflation”. It seems like transitory has been used as a companion for so long that many believed it, until now. However, how often is the leadership at the Fed actually right in their forecasts? History should cast some doubt and Powell may have capitulated near the top.

Types of Inflation

We hear about “cost push” and “demand pull” inflation, but what’s the root cause of our predicament?

Is the Biden administration correct that it’s because doing so well that we’re buying up all the available goods? Looking at recent savings data suggests that’s not the case. Also, consumer sentiment numbers, buying plans, and even recent Black Friday/Cyber Monday numbers suggest that consumers are pulling back.

Rather than looking at inflation in the two categories outlined above, I want to look at it from the perspective of COVID-related policies and Federal Reserve policies.

COVID Policies

The realities are that COVID policies globally have diminished productivity and output. For example, South Vietnam shut down all production for over three months. That is a lot of products that aren’t being made. Policies have diminished the output of a worker, the total product produced and has seen workers leave the workforce. Scarcity of labor, products and rising wages have contributed greatly to inflation. This type of inflation will be “sticky.”

Federal Reserve Policies

What happens when the Fed increases their balance sheet by over $5 trillion dollars? It’s like the Tootsie Roll pop, “the world may never know”. That’s because we’ve never engaged in this level of monetary insanity. The experiment that is being conducted by a body created in a place called “Jekyll Island” is ominous to say the least.

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