Prepare for more inflation…for longer!

Was expected. The US Federal Reserve (Fed) increased interest rates by 50 basis points at the last meeting of the Federal Open Market Committee (FOMC) in 2022. What really caught our attention was what its president, Jerome Powell, said at a press conference after the meeting.

There he was asked if the Fed could consider raising its inflation target, to which he initially replied that they were not contemplating it and that they would not consider it under any circumstances, but would keep it at 2 percent. Seconds later – in that same response – he said that there could be a longer-term project with a fresh look at the central bank’s inflation targeting.

That comment, which seems minor, is very important because it opens the door for the Federal Reserve’s inflation target to be increased. But let’s see what some other economists say about it:

• David Wilcox of Bloomberg Economics says that while Powell at the news conference rejected any idea of ​​rethinking the 2 percent inflation target for the foreseeable future, he is implicitly leaving open the possibility of reviewing it later, perhaps around 2025. .

• Axel Merk, president of the investment firm Merk Investments, points out that Powell opened the door to a higher inflation target, so that was an irresponsible speech because it risks unanchoring inflation expectations.

• Ann Owen, a former Fed economist, says the US central bank announced its official 2 percent target in 2012 under President Ben Bernanke, and to backtrack now would send exactly the wrong message at the wrong time. If they keep changing their targets, she warns, it’s very hard for people to form consistent inflation expectations, because they’ll think they’re losing the battle against inflation, further fueling higher prices.

• Bill Ackman, CEO of Pershing Square Capital Management, believes the Fed’s 2 percent inflation target is “no longer credible” and that one around 3 percent would be a better strategy for long-term growth. He points out that deglobalization, the transition to alternative energy, the need to pay workers more, lower-risk and shorter supply chains are all inflationary, and the Fed can’t change its target now, but it likely will. in the future.

Also relevant was that Powell gave signals that there will be more interest rate hikessince he believes that they are needed to be much higher to fully control the worst inflation to hit the economy in four decades.

Fed policymakers forecast that its short-term key rate will reach a range of 5 to 5.25 percent by the end of 2023, a threshold that, if crossed –as we have already explained in this space–, it will throw the economy into an inevitable and severe recession.

This rate forecast suggests that the US central bank is ready to raise its rate by an additional three-quarters of a point and leave it there for an extended period. Some economists naively expected the Fed to only project an additional half point increase. They are going to fail.

OPINION: Bitcoin and cryptos: a year to forget

Higher inflation target = high rates = dying risk markets

Without a doubt, the projections of the Fed and the most seasoned economists are very bad news for stock markets, emerging markets and risk markets in general (particularly cryptocurrencies).

It is time to manage a low-risk profile in our investment portfolios, as getting excited about short-term “rallies” (rises) and with false hopes that risk markets “are going to recover” will only bring losses to unsuspecting investors . Be careful.

Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.

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