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Dow Future, Gold slip as Fed may accelerate QE tapering and hike rates thrice in 2022 to control surging inflation

calendar 25/11/2021 - 20:44 UTC

Dow Future is almost flat for November after rallying almost +6% in October. In early November, Dow was boosted by a less hawkish hold by Fed but eventually was dragged down by growing concern of a faster than expected tightening. Dow was also boosted briefly on the surprised renomination of Powell (as Fed Chair) as he is seen as less hawkish on regulation for banks & financials. But eventually, Dow slips after Biden’s speech on Powell renomination as Fed Chair and Brainard' nomination as Fed VC. Biden not only stressed controlling uncontrolled inflation but also gave priority to regulatory risk management by Fed.

USD/US bond yield jumped, while Gold, Equities slumped on the prospect of faster tightening after Biden renominated Powell as Fed Chair and Brainard as VC (vice-chair). The probable reappointment of Powell as Fed Chair will not only ensure present policy continuity but may also prompt for faster tightening (QE tapering, QT, and Liftoff). Powell and Brainard as well as Biden vowed to tackle surging inflation as the number one priority.

Brainard was seen as less hawkish than Powell. And for the last few weeks, a high probability Brainard was being appointed as Fed Chair instead of Powell because of Powell’s insider trading and deregulation issues. But Biden kept a fine balancing act by renominating Powell as Fed Chair and nominating Brainard as Fed VC in place of Clarida, whose term will expire in Jan’22; Clarida was also accused of insider trading and is seen as a ‘serious’ trader.

Biden didn’t take any undue risk in such tough times of tapering to tightening and fighting inflation by nominating someone new and relatively less experience like Brainard. In any way, Biden’s decision to renominate Powell as Fed Chair is subjected to Congressional approval. Although Democrat Senator Warren may oppose ‘dangerous man’ Powell on bank deregulation issues, being an erstwhile Republican (Trump) appointed Central Banker (Fed Chair), Powell may also get Republican support this time; i.e. it may be bipartisan as in 2017.

By nominating Powell and Brainard as Fed Chair and Vice-Chair, President Biden ensured policy continuity, stability, and a vigorous fight against inflation. Biden also satisfied Democrat’s progressive/socialistic agenda. In any way, the ‘unexpected’ renomination of Powell was seen as hawkish for USD in hopes of accelerated tightening to control uncontrolled Bidenflation, which is helping Biden’s approval rate sinking before the 2022 mid-term election.

Biden will not risk his political career, or prospect of 2022 mid-term election and losing trifecta by allowing inflation hotter and hotter. Democrats may lose House in the 2022 mid-term election. And Wall Street under stress on higher bond yields; i.e. higher borrowing costs as Fed, under Powell may tighten more quickly than being expected by the market. But even if Brainard was chosen as Fed Chair, Fed’s present policy of faster tightening by ensuring goldilocks economic/employment recovery would be the same.

Fed is set for liftoff by Sep-Dec’22 after the completion of QE tapering by the June’22 timeline. Now the question is whether Fed will opt for one or two rate hikes in H2-2022. Fed is already behind the inflation curve. Thus Fed will primarily judge the maximum employment mandate for its liftoff decision. In his November policy meeting Q&A, Powell reiterated several times about the maximum employment mandate as a primary pre-condition for liftoff despite surging Bidenflation. On Thursday, all focus was also on U.S. jobless claims, which serves as a proxy for the unemployment trend.

The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) slips below pre-COVID 212K levels to 199K in the week ending 20th November, from 270K in the previous week, well below the market expectations of 260K and the lowest in 52-years (since Nov’69) amid expiry of extended PUA benefit, strong demand for labor, ongoing economic reopening, and some seasonal adjustment.

The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for a while (more than a week under UI), further slip to 2049K (fresh post COVID low) in the week ending 13th November, from 2049K a week before, but slightly above market expectations of 2033K.

The Pandemic Unemployment Assistant (PUA) initial claims in the U.S., which measure unemployed people, applying for financial help (covers uninsured workers that do not qualify for initial claims under UI), increased to 1616K in the week ending 20th November, from 1380K in the previous week.

Overall, as per U.S. continuing jobless claims of all types and depending on the actual seasonal adjustment, the number of employed persons should be around 158735K (as per household survey data which includes self-employed persons), not very far from Fed’s maximum employment target of 160000K (estimates).

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Now from maximum employment to price stability (inflation) front, U.S. core PCE inflation increased +0.4% sequentially in October from +0.2% in September, in line with expectations. The U.S. core PCE inflation jumped +4.1% in November from prior +3.7% in October, right on the expectations, and at 31-years high (since Jan’91), now over double of Fed’s +2.0% symmetrical targets.

As Biden pointed out in his speech on Powell renomination that due to substantial progress in maximum employment, Fed is in a position to attack inflation from a position of strength rather than weakness, Fed may double its QE tapering pace from Jan’22 to $30B/M and close the QE buying by Mar’22. Then Fed may go for liftoff from June’22 itself for three rate hikes in 2022 (June-September-December) and may also start QT.

The November FOMC minutes show that various policymakers are open to accelerating the QE tapering if high inflation held and would move faster to raise rates:

"Various participants noted that the (policy-setting) committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee's objectives. And all agreed the FOMC would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives."

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