On the heels of today’s rate hike, this is why the Fed is now in serious trouble.
Fed In Serious Trouble
June 13 (King World News) – Here is what Peter Boockvar had to say as the world awaits the next round of monetary madness: In addition to raising the Fed funds rate by 25 bps today to a range of 1.75-2%, the Fed will also raise the interest paid on excess reserves by just 20 bps for the 2nd meeting in a row in order to get the effective (actual) fed funds rate to the middle part of their range. It has been trending up towards the upper end of the range…
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Boockvar continues: They will also likely tweak the wording about how accommodative they are and I’m most interested to hear what they have to say about inflation. Central bankers always want higher inflation but it could also be their worst nightmare if it gets too high as they have to deal with it and it takes away much of their flexibility. Today’s PPI should be noteworthy after yesterday’s 6 yr high in CPI. We will all debate whether the statement and press conference was dovish or hawkish but I think bottom line is the Fed will continue on the path they’ve laid out.
Expect another hike in September and the Fed will play it by ear in December. We’ll also see today whether they change the scheduling of press conferences and plan for having one at every meeting instead of just half of them. It makes sense if they do so they can get out from underneath the scenario of only being able to hike at press conference meetings. Also, we will get another form of tightening in two weeks plus when QT goes to $120b in Q3 from $90b in Q2.
Producer price inflation ran hotter than expected in May. The headline gain was .5% m/o/m and 3.1% y/o/y vs the forecast of up .3% and 2.8% respectively. That headline y/o/y print is the highest since December 2011. The core rate was up by .3% m/o/m and 2.4% y/o/y, both one tenth more than expected.
Of note was the 4th .3% m/o/m increase in goods prices ex food and energy in the past 5 months. Remember, we’ve seen persistent core goods deflation in CPI and it seems inevitable that this price pressure in PPI will eventually spill over into CPI. Combine this with sticky services inflation running around 3% and the Fed can’t rest easy. Goods prices at the headline level rose 1% m/o/m with about half of this contributed by a 10% increase in gasoline prices.
On the service side, all my readers know I’ve been talking about rising trucking costs for a while (see chart below).
Trucking Costs Skyrocket 20%-40% In One Year!
In today’s report ‘truck transportation of freight’ prices rose .8% m/o/m and 6.5% y/o/y. That’s even generous as I’ve heard prices rising 20-40% y/o/y. This helped to drive the rise in services PPI.
King World News note: The continued upward pressure in global inflation is going to be extremely bullish for gold and silver in the medium- to long-term. It will also be wildly bullish for the high-quality companies that mine the metals, even though virtually no one seems to agree with that today. The next leg higher in the metals and mining shares will be breathtaking.
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