The Federal Reserve revealed that it begins to raise interest rates a full year earlier than it expected just 3 months ago. Instead of starting to raise rates in 2024, the Fed now believes it will begin in 2023. The Fed also significantly increased its guidance on core personal consumption expenditure inflation in 2021 to 3% from the 2.2% it had been projecting in March. A change from 2.2% to 3% is a stunning 36% increase in inflation expectations. That is a massive revision in just 3 months!
We should start wondering what happens next and the Fed is wrong. How much higher can these revisions go and what are they expecting in 3, 6 or 12 months? Given that for months we have seen rising energy prices, food prices, metals prices, lumber prices, shipping rates, housing prices, we see inflation everywhere!
Chances that inflation is getting out of control are high. The amount of money that central banks have created since the outbreak of the financial crisis in 2008 has put us in uncharted territory and interest rates have been historically low for a long time. Central bank balance sheets were already historically stretched prior to COVID-19. The response to the pandemic even increased the extreme easy-money policy.
We are now all players in the biggest central banking experiment of all times. And nobody knows how this is going to play out.
Sven Franssen