Average Inflation Targeting

The most important economic news for August came - as usual - from the U.S. Federal Reserve. On August 27th, Chairman Powell commented on the U.S. Federal Reserve’s new guidance while at Jackson Hole, Wyoming. The announcement revealed that the U.S. Federal Reserve will start using “average inflation targeting” instead of just annualized inflation. This will delay any eventual hike in interest rates, because they will be measuring the average inflation rate over a period of time. Chairman Powell also stated that he anticipates letting inflation run higher than the standard 2% target before considering a change in rates. Finally, the U.S. Federal Reserve shifted its approach to employment in such a way that will focus on those at the lower end of the income spectrum.

What this means - as our index trends indicate - is that the commodity, debt, and currency markets are agreeing that inflation will be allowed to return. Prior to this, inflation has been nearly non-existent since President Obama was elected.

In my view, there are two things that need to happen before we will see a true rise in inflation. First, the decline in the U.S. Dollar needs to continue. The U.S. Dollar rallied for nearly nine years before topping in March of 2020. It has been in an intermediate downtrend since then. Second, the U.S. Federal Reserve needs to end the payments it makes to banks on excess reserves. These payments inhibit banks from making loans, which has helped the velocity of money to drop from 1.4 to 1.1 this year. True inflation comes from an increase in the velocity of money, not from the quantity of money available. Piles of cash sitting in reserve accounts do not affect price changes; the “turnover” of that cash does. The higher the turnover, the greater the increase in prices, i.e. inflation.

Equities rallied in August, with the S&P 500 futures (PR) up +7.2%. Other factors that will likely affect the markets are the state of U.S./China relations and the upcoming November election.

For now, the Fed Oracles have spoken, and signs point to trends continuing.

The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision. Any investments made by a party in reliance thereon are made at such party’s sole risk. No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events are provided. Past performance is not necessarily indicative of future results.