The Fed “will inflict pain” to bring inflation down to 2%, said Alfonso Peccatiello, author of The Macro Compass. The resulting central bank policy will negatively affect stocks and cryptocurrencies.
In his August 26 speech in Jackson Hole, Federal Reserve Chairman Jerome Powell adopted a hawkish tone, saying that reducing inflation “will bring pain to families and businesses.”
“Those are pretty strong words for a politician,” Peccatiello said. “What he means is that the Fed won’t stop until the job is done. The job means that inflation returns to 2 percent “.
Peccatiello added that the effect of the Fed’s policy on “assets at risk” such as stocks and cryptocurrencies could be disastrous.
“[The Fed] it has to keep its monetary policy tight, ”he said. “When real returns are high, every investment you are making becomes less attractive from a valuation point of view.”
Peccatiello spoke to David Lin, host and producer of Kitco News.
A Fed Credibility Gap
Powell’s Jackson Hole speech means the Fed is trying to regain credibility after it failed to keep inflation around its 2% target, Peccatiello said. This means that the Fed will not “turn around” and cut rates until “the job is done”.
US inflation is currently 8.5% in July.
“You don’t regain credibility by moving the stake,” he added. “The stake is 2%. [inflation]. “
Powell previously signaled that he wanted an upward trend in real yields, making it more difficult to borrow capital. After Powell’s Jackson Hole speech, five-year real yields, which are nominal yields minus inflation expectations, have turned positive.
“We are talking about positive real returns of nearly 1% in the United States,” said Peccatiello. “[Powell] has achieved that goal, which gives it credibility “.
Peccatiello said Powell will reach his inflation target of 2% “if he inflicts enough suffering on the private sector … The bond market is evaluating a fair chance, around 35%, that the Fed funds rate will rise to 4%.” .
The winter of discontent in Europe
As the Fed tries to tame inflation, Europe is struggling with rising energy prices. The reference price of electricity in Europe has risen to 10 times the 10-year average and natural gas prices have reached € 321 ($ 321) per MWh, compared to € 27 ($ 27) per MWh a year ago.
This comes when Russia closed the Nord Stream 1 pipeline for maintenance. Russia supplies 40 percent of the European Union’s natural gas needs.
“About 7 to 10 percent of [Europe’s] The GDP bill comes from electricity, energy and gas during the winter, “said Peccatiello.” This is extremely large. We are talking about a cost as big as a banking crisis in Europe … I think, based on the base case , that Europe will barely get through the winter at a very high price. “
He added that in the long run, Europe will have to change its energy model, “to make sure it has other sources of energy to continue supplying and producing goods that it can export.”
To find out the prospects for Peccatiello for shares and Bitcoin, watch the video above
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