It only took one ten-letter word from the US Federal Reserve to unsettle an entire market. That word was “transitory”.
The word seems innocuous enough.
It means temporary, brief, short-lived, passing and momentary. In other words, it means that something isn’t going to be around for a long time….
…. but when the term is applied to the low inflation rates we are experiencing, it has far-reaching implications.
The market was expecting – or should that be betting – that the Fed would cut interest rates at its latest meeting. They were lulled into believing that the Fed would bend to the wishes of the White House.
It shouldn’t come as a huge surprise to anyone that the Trump administration has been pushing for a 1% cut in interest rates and a resumption of Quantitative Easing.
It wants growth at any cost. It wants the stock market to move higher at any cost. And it wants the Fed to provide the ammunition.
But the Fed was not about to play ball. It believes that there are rumblings of inflation in the underbelly of the US economy.
One sign of inflation can be found in the average hourly rate that US companies pay for workers. It has risen from US$22.55 to US$23.24. That’s an increase of about 3% a year. That is also higher than the headline inflation rate of 1.9%.
It is not a problem yet. But it could be. So, it is not too surprising that the Fed is cautious.
Wage inflation can be a precursor to consumer prices inflation. The more money that households can spend, the greater are the chances that demand for goods and services could outstrip supply.
That is the definition of inflation. It is basic economics, which appears to have gone over the heads of those who reside in the White House.
Additionally, given the robust employment numbers, it doesn’t take a genius to work out that the last thing the US economy needs is more stimulus.
A version of this article first appeared in Stock Advisor.
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