Random Ramblings (II)

On the Fed, inflation, Middle East and NY Community Bancorp (et al.)

From Tuomas Malinen’s Forecasting Newsletter.

Issues contributed:

• The high volatility of inflation expectations is a worry for the Federal Reserve.

• The path of the Biden administration in the Middle East is riddled with risks.

• The collapse of the U.S. real estate begins its “harvesting” across the global banking sector.

I think major topics are now so far apart, yet interwoved, that the situation calls for the second instalment of Random Ramblings. Here, I will be discussing the Federal Reserve, inflation, the situation in the Middle East and recent banking woes, linked to the U.S. real estate. The Fed presser on Wednesday actually tied the topics together. The message delivered by the Fed it was a ‘mixed bag’, like I (implicitly) warned it could be.

If you read the FOMC (Federal Open Market Committee) statement, and the comments made by Chair Jerome Powell on Wednesday, between the lines you notice a hint of political pressure and worry. The overall mood of the FOMC statement was positive. “Economic activity is growing robustly, “Job gains have moderated but remain strong”, “inflation has eased but remains elevated”. They were the messages markets, and the Biden administration, wanted to hear, because they imply that a rate cut is close. However, Chair Powell iterated, several times, the need to be “cautious” and that the Fed does not want to ease too early. In the latter part of the presser, he even floated the idea that the Fed will need to respond if inflation re-accelerates. Dr. Powell quickly walked back from it, though, by stating that at current time this looks unlikely. Yet, there was a clear mood of caution among the FOMC. Why?

Most likely for two reasons. The first is that inflation expectations have been very volatile of late. The second is the highly uncertain situation in the Middle East. I go through each in turn. I also naturally comment the situation with New York Community Bancorp, whose share price plunged by around 40% on Wednesday. Japanese lender, closely tied to the U.S. real estate market, faced a similar fate on Thursday. These are warning signs that the “Real-estatepocalypse” has started to hit the banking sector, like I first warned after the failure of the First Republic Bank in April.

The inflation conundrum