The late Paul Volcker was nicknamed the “dragon slayer” for defeating inflation while chairing the Federal Reserve in the 1980s. Current central bank chief Jerome Powell has yet to defeat his mythical beast – and Wall Street is starting to worry.
Powell warned Wednesday that the Fed’s fight against inflation was not over after annualized price growth accelerated to 3.2% in February.
It’s not yet clear whether the recent run of high inflation numbers is “more than just a bump” on the path to the Fed’s 2% target, Powell said. The bank is unlikely to cut interest rates until its target gets closer, he added.
Powell’s remarks and the news that a key manufacturing index rose last month for the first time since 2022 reignited inflation fears and dampened hopes that borrowing costs would soon fall.
Sound the alarm
Bank of America analysts have suggested that stubborn inflation could mean the Fed won’t start cutting rates until March next year.
Greenlight Capital’s David Einhorn also told CNBC on Wednesday that there may not be a rate cut this year, and said the pace of price increases appears to be accelerating.
“I think inflation is reaccelerating, I think there’s a lot of evidence of that,” the hedge fund manager said.
Einhorn revealed that Greenlight owns shares of the SPDR Gold Trust and physical gold bullion, making the popular hedge against inflation and stock market crashes a “very important position” for the firm.
The author of “Rich Dad Poor Dad,” Robert Kiyosaki, issued a similar warning in a Message Wednesday.
The personal finance guru said Powell had “finally admitted that inflation is winning” and advised people to buy gold, silver and bitcoin as he expects that rising prices erode the purchasing power of the dollar.
Gary Shilling, a Wall Street veteran known for hitting several market calls over the past four decades, highlighted the inflationary threat on the “Julia La Roche Show” in an interview published this week.
“It’s a harder task than many people thought,” he said, noting that services inflation tends to be stubborn. “We have a ways to go to get there.”
Merrill Lynch’s first chief economist also explained the risk of the Fed moving too quickly.
“The last thing they want to do is cut interest rates prematurely, cause inflation to surge, and then go back and actually kill the economy to restore credibility,” Shilling said.
The dragon raises its head again
It’s worth remembering how we got here. Inflation soared to more than 9% in the summer of 2022, prompting the Fed to raise its benchmark rate from near zero to more than 5% in less than 18 months.
The combination of rising prices and significantly higher borrowing costs has strained households, businesses and entire sectors like regional banks and commercial real estate.
It also fueled fears of a stock market crash and recession, even as stocks hit record highs and consumption growth, economic growth and employment proved resilient.
It’s no wonder investors are eagerly waiting for the Fed to cut rates. This would signal that the inflationary threat is over, reduce the risk of recession by stimulating the economy, and potentially increase risky assets like stocks and cryptocurrencies by reducing the returns offered by safer options like Treasuries. and savings accounts.
Inflation appears to be back on the menu, but not everyone is worried. Fundstrat’s famously bullish boss Tom Lee proclaimed this week that the company would fall “like a rock” and that the first rate cut would still happen in June.
businessinsider
