Inflation Set for 2 Years, GBP & EUR Climb

Despite some encouraging sentiment among Western nations that an economic boom is on the horizon, there has been some counterintuitive data which paints a less-than-rosy picture for the intermediate term.

Federal Reserve on Inflation

Both Britain and the United States had experienced a spending boom across the retail sectors in April and the first part of May; however, by last week, a series of economists considered inflation to be imminent.

Following those reports, the central bankers are beginning to make their perspectives known.

James B. Bullard, CEO of the Federal Reserve Bank of St. Louis, has now made his position clear on the forecast for the level of inflation that can be expected, as reports from the OMFIF briefing which took place on May 19 are beginning to be available in the public domain.

Mr. Bullard’s prediction is that inflation will be a more prominent feature soon, and that inflation is likely to be above 2% for the remainder of this year and for next year too.

Although relatively vague, Mr. Bullard’s comments continued to support the central bank’s policy, bolstered by a similar line of thinking that has been made public in separate remarks. He considers that during the current circumstances in which there are still lockdowns in various global regions and government officials are still concerned with restrictive matters due to their approach to COVID-19, there will be no talks relating to changing monetary policy.

On this note, Mr. Bullard said “When you are in crisis, we need to exit before thinking about changing policy.” On that basis, Mr. Bullard noted that these rising inflation expectations are ‘the key variable for monetary policy.’

Inflation Outlook Affects Gold

Some analysts have taken the view that Mr. Bullard’s delivery of inflation figures has served to quash concerns, and that as a result, gold prices have fallen this morning from an improved appetite toward risk, although losses were limited by a subdued dollar and bond yields.

This morning, spot gold dropped by 0.3% to $1,876.24 per ounce as of 0250 GMT, and U.S. gold futures fell 0.4% to $1,876.30 per ounce.

Mr. Bullard made a well-received comment about the labor market in that he believes that there are many reasons why workers are not returning to the labor force, and that therefore, a substantial number of businesses cannot find staff which he describes as frustrating. He noted that, despite of widespread supply chain bottlenecks and unexpected labour market tightness, ‘market judgement remains consistent with the plan we are laying down.’


Fed on Crypto

There is absolutely no doubt that over the past year, the world has entered a new era, perhaps an era that could be called ‘the new economy’. Mr. Bullard drew the astute conclusion that many members of the investing public are going into cryptocurrency ‘with their eyes wide open and are not blind to volatility’.

That is completely correct. Today’s cryptocurrency investors are completely unfazed by massive movements in prices, including that of last week, which was a drop of $700 billion by just five popular cryptocurrencies. That is more than the GDP of some western countries, but instead of lambasting cryptocurrency, even more people became interested.

To understand the magnitude of this shift in opinion, the response to the global financial crisis in 2008 and the Swiss National Bank’s removal of the EUR/CHF peg in 2015 were vast and involved rewriting of regulatory policy and new constraints for banks and financial markets participants, yet both were smaller and less instant than the cryptocurrency flash crash last week.

The absolute opposite occurred in that more and more people are interested in cryptocurrency and saw the drop as an opportunity.

Final Thoughts

Concluding, Mr. Bullard stated that the Federal Reserve is moving toward central bank mainstream policy regarding climate change risk, and that instability risks are at a higher level than normal but are not at an alarming level.

In terms of the US economy and its manufacturing output, Mr. Bullard pointed out that current US economy is ‘not geared to grow at 6% to 8% for a whole year,’ let alone several years, and the British pound is once again at a high against the US dollar of 1.42, and the euro is up considerably over last week’s figure at 1.23 compared to 1.16 for most of last week.

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