November 1, 2021

Inflation and The Fed

The Bureau of Economic Analysis released their Personal Consumption Expenditures report (PCE) which was for the month of September and it showed that inflation on the consumer level increased by 0.3%, which was slightly below expectations of 0.4%.  Year over year the index rose from 4.3% to 4.4% which was slightly below the 4.5% estimate, but is the highest inflation reading in thirty years!

Core PCE, which measures consumer inflation minus food and energy prices, and the main focus of the Federal Reserve, rose 0.2% in September and remained stable at 3.6% year over year, which was slightly below the estimate of 3.7%

Even though the Fed has been saying that inflation has been “transitory” or temporary, it is hard not to feel it and see it all around us.

Recently, the CEO of Twitter, Jack Dorsey, had commented on inflation and he said that he feels the United States is headed towards “Hyperinflation”.  Inflation is certainly at high levels as seen in this PCE report, but the likelihood of hyperinflation is very low.  Hyperinflation is very dangerous to a society as the value of currency drops drastically.  There have been several instances of this in history.  At one point, Germany was printing money so quickly it was only printing on one side of the paper.  Even to purchase a loaf of bread, it went from the US equivalent of 1 dollar to Billions of dollars.  While this can happen, we do have the Fed and they can step in to help avoid this.  They can lower their Quantitative Easing (QE) by tapering their bond and Treasury note purchases and they can also raise their Fed Funds rate to curb inflation, should they see inflation accelerating.

The Fed is in a tough spot.  If they taper their QE, that could impact interest rates negatively and if inflation continues to run hotter, that can also impact rates negatively.  However, if they raise the Federal Funds rate that could actually help curb inflation and in turn, bonds will react positively and interest rates could stay flat to lower.  The next few months are very important and we need to keep an eye on the Fed and inflation.

Source: https://bit.ly/38TtjP2

By: Jon Iacono
A Family

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