Will anything outweigh inflation this summer in the currency markets?

Inflation has been a hot topic for some time now and it has finally led central banks like the Federal Reserve to start fighting it aggressively as it has proven to be more persistent and entrenched than market expectations had predicted. fed. Without price stability, an economy cannot grow, and that is why controlling inflation is the most important objective of a central bank.

In fact, such high inflation has eroded consumers’ purchasing power so much that their sentiment towards the economy is at an all-time low. Consumer spending accounts for 70% of US GDP and that is why a depressed consumer is bad for the economy as a whole as they will spend less and less which ultimately leads to recession.

The market is now looking into recession. “History tells us that the Fed never accomplished a soft landing when inflation exceeded 5%,” as noted billionaire investor Stanley Druckenmiller recently noted at a conference. On top of that, there are plenty of other indications that a recession is pretty much certain. The stock market is in a bear market, the yield curve is inverted, consumer sentiment is at an all time high, inflation is still high, we can see big losses on global growth sensitive commodities like the copper, a very strong US dollar, aggressive tightening by the Fed and the main components of the PMI in contraction territory.

Everything indicates that the United States could already be in a recession or head there soon. To lower inflation at this point, a recession is welcome as demand will be lowered. One thing the Fed cannot do is suspend or even start cutting interest rates until inflation is clearly on a sustained downward path. The risk is that they pivot too early and fail to bring inflation back to their 2% target by settling at a higher rate.

It may look good if they settle at a higher rate, say 3%, but this will signal to the market that they are no longer serious about reaching 2% and lead to other worse consequences like losing credibility. That’s why, in my view, they will stay the course until the data shows that disinflation will bring the rate to 2% and they can take a break or start cutting interest rates.

This article was written by Giuseppe Dellamotta.

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