Not just temporary

2.12.2021 – Special Report. Now the cat is out of the bag: inflation is unlikely to be a transitory phenomenon. What anyone in their right mind suspected is being confirmed by the Federal Reserve. The question is whether the Fed will taper monetary policy sooner than expected. Because there are factors like Omicron. And also political considerations. 

Bringing tapering forward  

Jerome Powell, the most powerful central banker in the world, spoke unusual plain language on Tuesday. He said it was time “to retire that word”, meaning “transitory”. The high inflation could easily last until mid-2022, he told the Senate Banking Committee. Powell went on to say: “At this point the economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner. I expect we will discuss that at our upcoming meeting.”  

The markets immediately fell out of bed, and for several days now a correction has been underway that is crying out for a countermovement. So much plain language is indeed unheard of. Most of the time, the Fed speaks like an impenetrable oracle. In addition, the discussion about the Corona variant Omicron is raging. It could further damage supply chains and cause prices to rise. This is exactly what the OECD has just warned against.  

Catastrophic ratings for Biden  

Moreover, the statement has to be seen in political terms: Next November, Joe Biden’s Democrats will have to face the voters in the midterms. And “Sleepy Joe” is almost as unpopular as Donald Trump. RealClearPolitics has Biden at minus 9.4 points. The adorable but incompetent Vice President Kamala Harris, who bravely ignores her job of curbing illegal immigration, comes in at minus 11.2. And Trump is at minus 11.3 points. What’s interesting, then the leftist mainstream media continues to cozy up to the presumptive senile leader and the Dems despite a wave of violence (defund the police) and the Afghanistan withdrawal disaster. In contrast, Trump is met with the usual hate-filled media barrage.  

Career killer inflation 

Powell may be a Republican – but he owes Biden a small favor for recently confirming him as Fed chairman. Moreover, this time the interests run parallel. Lael Brainard, who was tipped as Powell’s successor – she’s now his deputy – advocates an even tighter loose monetary policy. That would mean even more inflation. The decline in purchasing power – currently around 6 percent inflation in the U.S. – has shot down politicians before. Among them Jimmy Carter, arguably the worst American president ever (a Democrat, of course). Now gasoline prices are rising, food is getting more expensive, houses anyway. Ergo, Biden needs a success against inflation.  


Our conclusion: on the one hand, sustained inflation would be a massive bullish factor for stocks, cryptos and precious metals. However, a throttling of monetary policy would sustainably stall the bull market that has lasted until recently. The market is partially anticipating the move. The most interesting indicator for the further development seems to us currently the Nasdaq Composite: It has touched down exactly on the 50-day line at 15,254. Bernstein Bank is keeping an eye on the topic for you! 


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