Where’s The Beef? Is The US Fed Behind The Inflation Curve?

We recently completed some interesting research related to one of our newest Custom Indexes – the Commodities to Smart Cash Index (C2SC Heat Index) – weighted by the US Dollar and VIX. We’ve been reviewing this new index for months watching it to see how it reacts to various trends in Lumber, Gold, Treasury Yields, the Smart Cash Index, and other weighted values. Recently, we added the Fed Funds Rate to this chart and suddenly things took on a different perspective.

We had drawn horizontal lines on the Commodities to Smart Cash index highlighting historical high, low, and confluence price levels. Historically, when we see a chart that channels in a sideways range, one can often identify high and low price thresholds while also trying to find a confluence level (where a continued rise or decline in price is likely to continue). We can see how the US Fed reacted to rising inflationary concerns almost immediately as the C2SC Index rose near or above 6.5 (the RED Confluence level) throughout the past 25 years. Each time, in 1994, 1999, and 2005, when a period of increasing inflationary trends, the Fed was quick to act to contain inflation. The only time the Fed acted differently was in 2013~2015 and in 2020~now.

Where's the Fed? Watch Precious Metals For Signs Of Panic

In 2013~2015, the C2SC Index rose above the Confluence level (the RED line) multiple times, yet the Fed kept rates extremely low – ignoring inflationary risks at that time. Then, in 2016, the Fed raised rates very slightly in an effort to test the global market’s reaction to tightening financial policy ahead of a big US election event. By mid-2017, the C2SC index started rising and the US Fed continued to raise interest rates. By late 2017, the C2SC index had risen past the RED Confluence level again and the US Fed continued to raise rates well into early Summer 2018. 

In August 2018, the Fed attempted another 0.25% raise that broke the market trend and prompted a broad market decline into December 2018. In reaction to this breakdown in US markets, the US Fed dropped the Fed Funds Rate from 2.5% to 1.5% in a panic move.It stayed at that level until COVID-19 hit in February/March 2020.

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