Yesterday we talked about the Fed’s announcement that it was going to exit the corporate bond market (i.e. sell its corporate bonds).
Again, this was the Fed’s most extreme emergency measure last year – where the Fed intervened through the stock market, buying corporate bond ETFs. And again, this recent decision to go out is a signal of the beginning of the end of these emergency policies – the policies that underlie / promote risk taking and the persistent rise in asset prices.
But don’t worry, it will be slow and orderly. The next step will be to reduce purchases of cash and mortgages. And finally, they will move interest rates away from the zero line. The chronology of the evolution of rates is one year, even years (if we are to believe the indications of the Fed).
In the meantime, we are only a month away from seeing Q2 data exploding, both expectations and comparable data from a year ago (economic data and corporate earnings). And inflation data is already moving at a rate not seen, in some cases, for more than forty years.
So the point is, the Fed is already behind the curve – way behind.
Add to that, starting next week and over the next four weeks, nearly half of U.S. states will voluntarily end the Federal Unemployment Grant. With this, we have yet to see how the salary increase it will be when employers are finally able to fill the positions. Of course, employers will soon pass higher employment costs on to consumers. This “wage component” will be like pouring gasoline on the fire of inflation data – already fueled by pent-up demand responding to supply chain bottlenecks.
So, despite today’s pullbacks in commodities and most of the world’s stock markets, on the premise that the Fed’s small step towards emergency policy exits is somehow bad for “the risk environment ”, the political position will continue to be very accommodating. Real interest rates (inflation minus nominal rates) will remain negative for some time (probably on their way to becoming even more negative). It promotes spending, not savings. And in this environment, we have seen (in some asset classes) that spending behavior turns into an increasingly high price race.
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