Save us, Daddy JPow — The Fed concluded its 2-day FOMC extravaganza yesterday, finishing off the festivities with an announced 50 bps rate hike and some additional guidance on the unwind of their balance sheet.
The quantitative tightening formula that Daddy JPow’s team is using is a bigger unknown to the markets than the anticipated rate hikes.
In the recent past, the Fed has actually been the largest buyer in the treasury markets through its quantitative easing program. Now that this is no longer the case, I’m not sure the market really knows what to expect.
Rising interest rates will hopefully whip inflation for the dollar in the tail. Expect central bankers across the world to start considering moves in interest rates, except for the Chinese.
Earlier in April, their central bank made a surprise move to keep interest rates at record lows. Mind you, yesterday’s FOMC announcement was the second rate hike of this tightening cycle, and the Chinese were actually considering lowering rates.
China still has historically low-interest rates, and with the ongoing application of zero-C19 policy, you can expect to see more stimulus from their government to boost economic output.
Even in an inflationary environment, the Communist Party demands an expansion of the Sleeping Dragon’s GDP. Keeping tens of millions of citizens under lockdown does not support 5.5% year-over-year GDP growth, so loose monetary and fiscal policy is how China will force growth.
But won’t this add fuel to the inflationary fire? The answer, of course, is yes. Chinese goods are already getting more expensive due to inflation in China.
Chinese manufacturers, seen as the world’s factories, have had no choice but to drive up prices, putting upward pressure on prices throughout the global economy. But that’s not the end of it.
PRC policy is also injecting inflationary pressure into the global food and steel markets.
The Communist Party has placed significant restrictions on steel production while introducing import tariffs on the critical raw material; this is steel that producers in other countries rely on to produce goods for other markets. Apparently, China wants to curb production – literally to become more ESG.
China has also introduced fertilizer export restrictions. We’ve talked about a potential food crisis as a result of fertilizer concerns due to the Russia-Ukraine War; well, this restriction isn’t helping things.
Finally, the global pork supply is another point of contention. There’s a complicated cat and mouse game of tariffs with complementary retaliatory tariffs between China and other countries, and this inefficiency is inflationary.
None of this makes Daddy JPow’s job any easier. Maybe, in the words of Paul Tudor Jones, Central Bankers should start looking for another job?
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