The Federal Reserve passes responsibility for inflation

So when inflation threatens to potentially destabilize the dollar, it’s up to the Fed to take action. There are a number of tools at your disposal, but the most effective in this situation is to cool the economy by raising interest rates. With US inflation rates now at 40-year highs, that’s what the Fed is doing.
Federal Reserve Chairman Jerome Powell announced last week that the Fed will raise interest rates by an aggressive three-quarters of a percentage point, the biggest increase in 28 years. But he also took a darker tone than at previous meetings, admitting that some factors are out of his control.

The Fed’s objective is to reduce the inflation rate to 2%, keeping the labor market strong, said Powell said on Wednesday, but “I think what’s becoming clearer is that a lot of factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” he said. Commodity prices, the war in Ukraine and supply chain chaos will continue to impact inflation, he said, and no change in monetary policy will mitigate these things.

There is still a path to bring inflation rates down to 2%, he said, but that path is increasingly being encroached on by these external forces.

Powell’s speech was largely at odds with messages from the White House, which emphasized that the Fed is America’s designated inflation fighter.

Earlier this month, when economic data showed that inflation was still at a 40-year high and consumer sentiment had fallen to a record low, the Biden administration pointed to the Federal Reserve’s role in keeping prices in check.

“The Fed has the tools it needs and we’re giving them the space they need to operate,” said Brian Deese, director of the National Economic Council.

Last week, though, Powell was pushing another narrative. Rising gas and food prices, he said, are not under his control. Proper monetary policy alone can no longer bring us back to a 2% inflation rate with a strong labor market, he said.

“A lot of this really isn’t down to monetary policy,” Powell said Wednesday. β€œThe aftermath of the war in Ukraine brought a rise in the prices of energy, food, fertilizers, industrial chemicals and also just the broader supply chains, which were longer – or longer lasting than anticipated.”

Mark Zandi, chief economist at Moody’s Analytics, agrees with this view. “The main culprit [of inflation] was the rise in energy prices, particularly gasoline, and much of that can be traced back to Russia’s invasion of Ukraine, which caused global oil prices to skyrocket,” he said in a recent episode of his podcast, Moody’s Talks. The pandemic subsides and the market adjusts to new sanctions against Russia, he added.

It’s hard to say whether raising interest rates will help limit the spread of inflation or whether it’s too late. Powell appears to be protecting himself. “I think the events of the last few months have increased the difficulty, created great challenges,” Powell said. “And there’s a much greater chance now of depending on factors that we don’t control.”

The $5.7 billion bet against Europe

Some wealthy Americans like to vacation in Europe. Connecticut’s richest man prefers to place multibillion-dollar bets against the economic future of the old world.

Ray Dalio’s Bridgewater Associates is betting nearly $6 billion that European stocks will fall. This makes the world’s biggest hedge fund the biggest short seller of Euro shares.

In all, Bridgewater has 18 active short bets against European companies, including a $1 billion position against semiconductor company ASML Holding and a $752 million bet against oil and energy company TotalEnergies SE.

This isn’t Bridgewater’s first rodeo. Dalio hasn’t been on Europe’s side for some time. In 2020, Bridgewater bet $14 billion in equities and in 2018 built a $22 billion short position against the region.

Pourquoi? Bridgewater has been pretty quiet about their entire strategy for the Euro in general, but some clues emerged from an interview Dalio gave to Italian newspaper La Repubblica last week. He explained that Bridgewater is staying away from countries that are at risk of domestic conflict or international war. He also said he is concerned about central banks’ attempts to deal with high inflation and predicts the economy will soon turn sour because of them.

In short, he is selling short because of the war in Ukraine and the aggressive policy of the European Central Banks.

But maybe it’s about the battle for world order. One thing Dalio is not shy about is sharing his broader worldview. In a series of LinkedIn blog posts, he explained why he thinks the US is rapidly heading towards civil war and how the global world order is changing.

“The Russia-Ukraine-US-Other countries dynamic is the most attention-grabbing part of the ongoing dynamics of the changing world order,” he writes. “But it’s essentially just the first battle in what will be a long war for control of the world order.”

It may be that Bridgewater, which has $151 billion in assets, is betting that Europe will not emerge from the war on top.

So far, that bet is paying off. The company saw a 26.2% gain in its flagship Pure Alpha fund this year, while the S&P 500 lost nearly 24%.

The STOXX Europe 600, a broad index measuring the European stock market, is down around 17% year-to-date.

Next

Monday: Juneteenth holiday, markets closed in USA.

Tuesday: Existing home sales for May.

Wednesday: Federal Reserve Chairman Jerome Powell is due to testify about the economic outlook in Washington DC.

Thursday: Initial Unemployment Claims; The Energy Information Administration (EIA) crude oil inventories.

Friday: New house sales for May.

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