Return of inflation could force Fed to tighten, warns Jim Bianco


The Federal Reserve’s intention to leave interest rates alone could be hijacked.

According to Wall Street forecaster James Bianco, the context is favorable for a return of inflation which would force the Fed to tighten and upset the stock market.

He sees two main factors triggering inflation: a smaller economy than last year due to coronavirus lockdowns and the impact of massive monetary and fiscal stimulus.

“We are producing less gross domestic product or less stuff. The excess capacity has been depleted somewhat,” the president of Bianco Research told CNBC. “Trading nation“Monday.” You have less supply [and] you stimulate demand. This usually leads to higher prices. “

Bianco argues that this is a serious risk for 2021 that Wall Street should consider worrying about now.

“The Fed is like a pole in the ground and the market is like a horse tied to that pole,” he said. “When that horse is scared of something – call it inflation – he could rip the pole off the ground and run wherever he wants. He’ll run, and the Fed might have no choice but to follow him.”

Bianco speculates that the first signs of inflation will appear in the basic personal consumption expenditure (PCE) price index, which is considered the Fed’s measure of inflation. It is currently 1.6%, but Bianco warns it could reach 2.5% by the middle of next year.

“It has not exceeded 2.5% in 27 years”

“It hasn’t gone over 2.5% in 27 years,” he said. “It’s a good place to start wondering if we’re getting inflation.”

As PCE Core Rises, Bianco Predicts Benchmark Yield on 10-year treasury bills will also firm up. It’s around 0.77% now, and it won’t rule out a move towards 1% this year. By next April or May, he thinks it could reach 1.25%.

If the Fed buys trillions of dollars in treasury bills to keep inflation low and the 10-year yield can rise by at least 20 basis points, Bianco warns it’s a troubling signal .

“The market likes the idea of ​​stimulus, and they’ve really pushed it because they don’t see inflation as an issue,” Bianco said.

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