Will FED still stay committed?

Will FED still stay committed?
Analysis
Ahura Chalki
Author:
Ahura Chalki
Published on: 28.05.2021 21:59 (UTC)
Post reading time: 2.12 min
1366

Inflation and largest annual gain since 1992


According to the U.S. Commerce Department published data earlier today, U.S. consumer prices rise sharply in April. Inflation in April rose much more than FED's 2%target and with the most significant annual gain printed 3.1%. Fast-growing inflation has been seen because of vaccination and the enormous stimulus of the U.S. government. 

As FED chair Powell and other FOMC members have repeatedly been repeating, this increase in inflation was expected, and it will be short-lived, which means that it will have no impact on FED monetary policy. The Federal Reserve's justification is that this higher inflation will be placed with many years of staying lower than the target; that's why they can permit higher inflation levels. 

Fast-growing prices basically have two reasons. First of all, YoY raise mainly is because of last year's lower prices caused by the pandemic. And now, with fast recovery from crises, we can see higher demand than supply in the production and service sector finally can get the advantage of reopenings, especially in the tourism industry. 

Gus Faucher, the chief economist at PNC Financial in Pittsburgh, Pennsylvania, said that "Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again. Shortages of labor in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021."

On the other hand, excluding the volatile food and energy components, the PCE price index increased just 0.7% in April, after with 0.4% gain in March. PCE price rise in April was the fastest rise since 2001. 

"Inflation is up, but real yields are still low," said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. "This is the transitory sweet spot."


Market Reaction

Even though if in the beginning, investors believed in FED and their idea that higher inflation would be short-lived and SP500 rose above $2,215, however with time passing, SP500 and other wall street indexes started losing ground and turn lower. 

USD Index also in the first reaction fall sharply bellow 90.00 level from weekly high above 90.42. And now DXY also started to be more logical and realize that 3.1% raise is not something that can be ignored easily. 

SP500 is turning lower in the technical chart, both in the chart and OBV trend line, while RSI is also easing under 50 after earlier trading in the O.B. area. 


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