Various surveys recently have shown investors growing more concerned about rising inflation. The Consumer Price Index rose a surprising 6.2% over the last year according to the latest data for October, the highest yearly rate since 1990.
A survey released last week found that sophisticated investors are becoming alarmed about the latest jump in inflation and are calling for the Fed to take immediate action to head it off. The latest CNBC Fed Survey – which polls knowledgeable market participants including economists, fund managers, market strategists and others – found that 60% want the Fed to halt all asset purchases NOW. Forget tapering, just stop.
This abrupt shift is quite surprising as it would almost certainly lead to a rise in short-term interest rates. Yet the CNBC Fed Survey crowd also indicated they believe the Fed should start raising short-term interest rates sooner than the Fed currently plans. Inflation has clearly got these sophisticated investors spooked!
As I discussed in Forecasts & Trends on Tuesday, the Fed announced last week it will begin reducing its $120 billion in monthly asset purchases by $15 billion a month starting later this month. It plans to end its monthly purchases of Treasury bills and mortgage-backed securities by next May. It currently doesn’t expect the first interest rate hike until December of next year.
Yet the CNBC Fed Survey crowd apparently believes all of that should be accelerated significantly. These folks are clearly worried inflation has gotten ahead of the Fed. This is in part due to some forecasters predicting that inflation has not peaked yet. In addition to calling for an immediate end to all Fed asset purchases, the CNBC Fed Survey called on the Fed to move up its date for the first interest rate hike from December to September of next year.
But the September average masks a more aggressive outlook: 44% of the survey respondents believe the Fed should raise rates by July, meaning rate hikes would follow the end of the taper by just a few months. Peter Boockvar, chief investment officer at Bleakley Advisory Group, warned: “The Fed’s current idea of dealing with inflation is to take their balance sheet from $8.5 trillion to about $9 trillion by next July and still have rates at zero,” noting that the Fed will still be adding to its balance sheet while it tapers. “Inflation and the bond market response are about to run over the Fed.” His view might be a little extreme, but that remains to be seen.
In any event, 60% of the CNBC Fed Survey respondents believe the Fed should get considerably more serious about fighting inflation, regardless of the implications for the economy. Calls for faster tightening come as concern about inflation has risen to the Number 1 Risk facing the economy, according to respondents, eclipsing COVID-19. The Fed Funds futures markets have a 58% probability of the first rate hike in June and a 73% chance of a second increase by December. This outlook has changed in a hurry!
As an aside, I would add that the unprecedented federal spending plans President Biden and Democrats in Congress are trying to ram down the public’s throat – over $5 trillion in total – are a big reason why the public concern over inflation has risen so much in the last few months. The American people know spending of that magnitude would ramp up inflation even further. So, they are right to object loudly.
Are We Looking At A Recession Next Year? It’s Very Possible
I’ll have much more to say on this question than what I can squeeze into the space I have left today, but I would say the odds of a recession next year have increased significantly. The current “supply chain” problem is getting worse, with dim prospects for resolving it anytime soon.
As just one example, I read that ports in southern California are receiving 29,000 cargo containers a day, but they can only move out 8,000 containers a day via trucks and train cars. They are simply out of space to store more containers than they can ship out each day, and this explains why there are many cargo ships anchored in the Pacific waiting to unload. The supply chain problem is getting worse, not better, at least in California and increasingly the East Coast.
We are being warned to do our holiday shopping now if we want the inventory to be there. Already there are bare shelves in some cities. The worry is if shortages are even worse by the holidays just ahead, consumer spending could fall significantly. With consumer spending accounting for 70% of GDP, the odds of a recession late this year or early next year are increasing.
Again, I’ll have much more to say about the outlook for a recession just ahead, but just know this supply chain problem is a big deal, and our leaders don’t have a clue what to do about it.
It may be time to recession-proof your investments to the extent you can. I’ll have more to say about that as well.
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