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Can The Fed Save Us From Inflation? Or Can Inflation Can Save Us From The Fed?

1. Persistently declining long term growth and an exploding debt burden has set Treasury yields on an ever lower crash point yield level.

The chart above shows persistently lower highs on the Ten Year Treasury bond yield since 1981. Simply, the economy has ever more limited capability to operate above a declining  yield ceiling. That yield level is now below 3% and falling.



2. In what kind of economy will 10 year Treasury yields stay well below 3%?

The chart above shows the close relationship between the 10 year Treasury yield less inflation and real GDP growth. Adding back inflation to both, that is the same as saying nominal GDP growth correlates closely with 10 year Treasury yields.

This means that for Treasuries to remain naturally below the crash point yield level,  nominal GDP needs to also stay low. With the Fed’s average inflation objective at 2%, and much higher currently, that does not leave much room for growth. Alternatively, the Fed could continue to intervene to ensure Treasury yields stay well below 3%.

Try to add real growth to inflation and get less than 3%!   That’s why the talk about tapering is just that. Any tapering will be minor and most likely the Fed will have to keep, or even accelerate, QE to keep Treasury yields distorted on the low side. As shown in previous notes, excessive Treasury bond support already seems to be in place.

Make no mistake the Fed has very limited capability to contain inflation. The Fed will likely have to choose between inflation and growth at some stage. History tells us that inflation is by far the easiest choice.

Don’t bet on the Fed fighting inflation too hard.



3. Consumer confidence has already failed to keep up with stocks.

The chart below shows that confidence remains fragile outside new intervention dynamics. Covid broke this tight relationship, amongst many others. Is this a break in policy or will they reconnect?



4. Foreign Investor confidence contines to fall, as the US dollar ‘s reserve currency status continues to slide.

The chart below shows that, not surprisingly, the US dollar is losing support for its reserve currency status. This means that the US will need more domestic support for its ever increasing debt financing demands.

QE may become an increasingly important source of financing. How would that fit in with inflation containment?



5. Now the third Fed Board member, this time the vice chairman, has indulged in questionable transactions. How far does this go?

Federal Reserve Vice Chair Richard Clarida traded between $1 million and $5 million out of a bond fund into stock funds one day before Chair Jerome Powell issued a statement flagging possible policy action as the pandemic worsened, his 2020 financial disclosures show.”

“From Kaplan to Rosengren to Clarida to Powell on trading & allocations and Bernanke & Yellen with millions in bank paid speaking fees all have shown to be profit motivated cashing in on their positions.”



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Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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