Inflation, Rising Interest Rates or Both Together?

At the hearing before Congress on Thursday, March 25, 2021, Fed Governor Jerome Powell was adamant that any resurgence of inflation in the US would be temporary (inflation above 2% for 2021), transitional and would in no way affect the Fed’s target of average inflation of 2%. But rising Federal Reserve bond yields point to increased inflation expectations.

President Joe Biden’s $1.9bn fiscal package poses several risks that may be extraordinarily strong in the run-up to the recovery of the US economy and the global economy.

by Thanos S. Chonthrogiannis

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Except for countries with strong reserves of foreign reserves and satisfactory levels of liquidity such as Russia, Indochina, Singapore, emerging markets are beginning to feel these strong risks in the form of capital flight (Turkey).

In addition, one can comfortably ask the question of what the fed’s degree of independence is when the government issues debt of a frightening magnitude and the FED is potentially its main buyer, currently ignoring the burden on the Fed’s balance sheet ($3.8trillion Q32019) to ($7.7trillion Q12021).

The FED is the main buyer of this government debt as the bond market is saturated due to near-zero and/or negative yields.

The influx of Joe Biden’s $1.93 billion fiscal package will also determine the growing increase in sellers relative to buyers, which is distinguished by the yield on the 10-year government bond from 0.920% (December 31, 2020) to 1.730% (March 19, 2021) (Data: Trust Economics).

So, it is this increase in the yield on the 10-year bond that shows the risks of high inflation, an increase in the level of public debt, fiscal growth, employment, and upwards moving interest rates in the future.

So, when this fiscal expansion begins in both the U.S. and global markets, the Fed’s options will be:

1. It will be forced to raise borrowing rates, creating a big drop in capital markets and the real economy later.

2. It will accept as something inevitable increased inflation because of its monetary policy.

3. FED will accept a state of stagnant inflation.

To avoid increased inflation in this situation, it is necessary to:

1. There should be a greater increase in the size of productivity than an increase in the size of inflation.

2. To drastically increase the level of deposits, so that this massive increase in incomes does not find the whole way out with increased consumer spending.

They will have to make another calculation, changing the percentage of expenditure directed at specific consumer food products, affecting the establishment of the Inflation Index.

It is possible if the pandemic continues and since to date the pandemic has changed the distribution of expenditure and households. We must not miss that the measurements of price increases during a pandemic are extremely limited.

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TRUST ECONOMICS

Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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