Will the Fed Wait for Low Inflation Forever? And What Does That Mean for Your Money?

[Inside Wall Street with Nomi Prins]( Will the Fed Wait for Low Inflation Forever? And What Does That Mean for Your Money? By Nomi Prins, Editor, Inside Wall Street with Nomi Prins Sometimes, the Federal Reserve reminds me of a child throwing a tantrum, crying about wanting dessert without finishing dinner first. Last week, in a move we predicted, the Fed chose to keep interest rates at 5.25%. The Fed thinks it can keep inflation down by keeping interest rates high. However, as we’ve [pointed out many times]( here, it can’t control inflation. Inflation is driven by supply-side and geopolitical factors. These factors just don’t care about what the Fed does with interest rates. So why do I follow its moves so closely? Why have I watched, analyzed, spoken to – and with – the Fed for several decades? And why do I insist on digging into the Fed’s mixed messaging here at Inside Wall Street? Because the Fed’s decisions do impact the wealth of everyday Americans – your wealth. So, today, let’s unpack the Fed’s latest Catch-22. And then, I’ll give you a one-click way you can use its internal chaos to your advantage. Recommended Link [Breaking News: Elon Musk Invents New Type of AI (Shocking)]( [image]( According to 30-year Silicon Valley and Wall Street veteran, Eric Fry… Who picked 41 plays that jumped 1,000%+… Elon Musk is about to shock the world again with [this new type of A.I…]( Minting new millionaires in the process. [Click here to see the details.]( -- The Fed Wants to Have Its Inflation Cake and Eat It Too Going into this latest Fed meeting, the market shifted expectations of a rate cut from March to June, to now perhaps July. That’s why, when the Fed revealed it was keeping rates unchanged, the news didn’t rock markets for long. Global equities dipped at first but then recovered after U.S. payrolls came in softer than expected. The payroll figure lent support to the notion that the Fed could view weaker employment data as a path toward cutting rates, even in the face of persistent inflation. That’s why U.S. 10-year Treasury note yields declined to close at 4.50% last week. Now, since the Fed began raising rates in March 2022, it has remained steadfast in its battle to drive inflation below 2%. Wall, meet head-banging of the Fed. However, the Fed cannot control inflation driven by supply and demand in tangible assets. And it cannot control inflation in the goods and services these assets build or power. The Fed's war on inflation has been incidental at best to the inflation driving up the price of oil, wheat, coffee, chocolate, eggs, copper, gold, silver, steel, iron, and so on. All of these prices, and more, have risen during the period since the Fed began raising rates. Fed policy hasn't done much to curb the cost of housing or rent or your car insurance, either. Inflation remains high in those two areas of the economy that are critical for nearly every American. Since 2020, motor vehicle insurance costs rose by 45%, while shelter expenses are up 22%. You can see that in the chart below… No level of rates can go back in time and stifle household demand that drove prices up from two years ago. No level of rates will help farmers to produce cheaper produce or auto insurers to ease their policy costs. The only items interest rates can affect are current and future financing demand. The higher the cost of money, the harder it is for people or small businesses to take on mortgage or car or businesses loans. So WHY Will the Fed Cut Rates? Fed Chair Jerome Powell considers the Fed to be “data driven.” But that should not mean blindly following topline numbers that are often misaligned with people’s true experiences. That’s why the Fed keeps harping on about inflation being too high compared to its magic 2% number. Yet, on the other hand, it talks about remaining focused on data, as if watching it will make a difference. All this mixed messaging is why I don’t think the Fed will wait until inflation falls, and stays, below 2% to cut rates. On paper, the Fed’s job is to maintain price and employment stability. So it will never admit just how little control it has over inflation. It would be a major blow to its credibility. Instead, it will place more emphasis on slowing GDP growth as an indicator of a slowing economy. It will do this to substantiate its accommodative monetary policy in meetings to come. That includes three rate cuts to come in the second half of this year. See, GDP growth slowed to 1.6% in the first quarter of 2024. That’s compared to 3.4% the prior quarter. Yet, inflation ticked up to 3.5% in March from 3.2% in February. That means it was the slower Q1 2024 GDP growth that prompted the Fed to reduce its quantitative tightening (QT) pace. Going forward, the Fed won’t be “tapering” its book at a pace of $60 billion per month. (“Tapering” is when it stops replacing maturing Treasury bonds with new ones.) Instead, the Fed chopped that amount to $25 billion per month. This QT retreat was not a surprise to us here, either. As longtime readers will recall, [we noted]( the Fed would slow down the pace of QT based on our analysis of the March Fed meeting minutes. The move is the first of potentially many for the Fed to retain its nearly $7.4 trillion book of assets. Assets it accumulated through quantitative easing (QE) in the wake of the 2008 financial crisis and Covid pandemic. By slowing QT, the Fed can temper the surging cost of long-term debt servicing. It can also temper losses in interest payment remittances to the U.S. Treasury. Losses which, as we’ve covered in these pages, have been mounting due to high rates. (For a refresher on this, and what I mean by “remittances,” catch up [here]( and [here]( Reducing the QT runoff pace also cements the Fed as the largest last-resort buyer of U.S. Treasury debt. This comes at a time when other central banks, like the People’s Bank of China, are reducing their Treasury purchases in favor of buying gold. So what does this all mean for you? What This Means for Your Money Keeping more U.S. Treasuries on its books for longer indirectly drives up demand for long-dated Treasuries. And that creates an opportunity to take advantage of the Fed’s latest accommodative monetary policy move. The best way to do that is by investing in the Ultra 7-10 Year Treasury ETF (UST). That ETF would rise on the back of slower runoffs of long-term debt from the Fed's book or any rate cuts to come. UST is designed to deliver returns that are double the daily returns of the ICE U.S. Treasury 7-10 Year Bond Index. So, if the index goes up 1% in a day, this ETF aims to go up 2%. It’s a way to magnify your exposure to U.S. Treasury bonds in the 7-10 year maturity range. But keep in mind that this comes with some extra risks. Because if the index goes down 1%, UST would go down 2%. Regards, [signature] Nomi Prins Editor, Inside Wall Street with Nomi Prins --------------------------------------------------------------- Like what you’re reading? Send your thoughts to [feedback@rogueeconomics.com](mailto:feedback@rogueeconomics.com?subject=RE: Inside Wall Street Feedback). [Rogue Economincs]( Rogue Economics 55 NE 5th Avenue, Delray Beach, FL 33483 [www.rogueeconomics.com]( [Tweet]( [TWITTER]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. Rogue Economics welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-800-681-1765, Mon–Fri, 9am–7pm ET, or email us [here](mailto:memberservices@rogueeconomics.com). © 2024 Rogue Economics. All rights reserved. Any reproduction, copying, or redistribution of our content, in whole or in part, is prohibited without written permission from Rogue Economics. [Privacy Policy]( | [Terms of Use](