After two Fed governors said that economic growth outlook is "quite healthy" and domestic inflation expectations remain well contained, the dollar began to sell-off. Its seems that currency traders are concerned that a Fed pause will be premature since inflation continues to be a problem as witnessed by new highs in the metals, commodities, and energy markets.
Now that interest rates are approaching the upper end of the neutral zone (accommodative, neutral, restrictive), sooner or latter the pubic needs to realize that in order to effectively fight inflationary pressures, rates need to rise further, and the U.S. economy may have to be thrown into recession to halt the rampant run in commodity prices
Consumers are beginning to feel some pain.
We seem to be in a situation of catch 22, "pay me now, or pay me latter", but someone will eventually get paid. We will either accept the consequences of a recession, or incur more inflation.
MONETARY POLICY HELPED CREATE INFLATION
Its become obvious that monetary policy helped create some of the credit conditions consumers are witnessing today. Lenders created exotic mortgages, consumers pulled out cash from the appreciated values of their homes, and now its time to pay the piper.
After many homebuyer were suckered in to buying adjustable rate mortgages, some are realizing they were swindled, and are replacing their adjustable rate loans for longer term fixed ones.
I am looking for an increase in loan defaults and bankruptcies in the months ahead.
FISCAL POLICY CONTRIBUTED TOO
Government spending is out of control, and on March 16th, the Senate voted 51 to 49 to raise the debt ceiling on the national debt to almost $9 trillion. This is the fourth time the debt ceiling has been raised during the current administration.
OUR STANCE REMAINS CAUTIOUS
Unless I am way off base, I believe the new Fed Chairman will target the current inflation situation a little longer than investors expect. Even after the last fed meeting, there was no clear picture as to what the Fed's rate target would be.
We continue to believe that selling economically sensitive stocks into this rally is the most prudent approach.
