By: Jeff Anderson
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.02%|
Source: Wall St. Journal
The markets took an abrupt change Friday morning after Fed Governor Jay Powell delivered his speech at the Jackson Hole, Wyoming economic symposium. Consensus coming into the meeting was that the heavy lifting on rate hikes was behind us and the old dovish tone would return from Mr. Powell. It was not to be. “While the central bank’s steps to slow the rate of investment, spending and hiring ‘will bring down inflation, they will also bring some pain to households and businesses. Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain’” (emphasis added). One month of declining inflation isn’t enough for the Fed to slow down. He went on to say that bringing down inflation was likely to “require maintaining a restrictive policy stance for some time.”
So, what does this all mean? Simply put, the economy (& the consumer) should expect more pain now to avoid greater pain later if inflation were to become endemic. It’s important to keep in mind that we’ll get through this.
The Drought in the West has Company:
Corn yields across the major farmlands in the west and mid-west are declining, sparking fears this year’s lower harvest will “exacerbate the food inflation that’s already been gripping the world” says Bloomberg.com. Europe is in a severe drought as is China. If you’ve been watching the national evening news lately you’ve likely seen images of dried-up rivers or bridges extending over what look like streams rather than rivers across Europe. It’s bad. China is also dealing with severe drought conditions. In fact, parts of China are facing the worst drought since the 1960’s along tow major river basins that are responsible for nearly half of the nation’s rice production. China also relies on water for electricity as well. Yet, in the northeastern region, heavy rains have flooded areas that could reduce corn output by a meaningful amount. So, no rains in some regions and too much in others. The global farmland can’t catch a break. To use the adage, “when it rains it pours,” we just can’t catch a break. When things are bad, they just seem to get worse. Inflation can’t be completely controlled by simply raising interest rates. Mother nature has a to cooperate as well. Oh, and to add insult to injury, we have a fertilizer shortage because of war in Ukraine. Don’t expect inflation to come down anytime soon.
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