INFLATION: Trump, the Fed and the Calculation Error That Can Cost Expensive

[Igor Pereira]

While the media discusses trivialities, the Federal Reserve quietly began buying short-term government bonds (T-Bills) to increase bank reserves. They swear it. no Yeah. Quantitative Easing (QE), but let's call things by name: it's a disguised liquidity injection.

By Igor Pereira

At the same time, Donald Trump is destroying the myth of "independence on the Fed". By reopening the race for the Central Bank president's chair and putting names like Kevin Warsh in the mixture, the message is clear: whoever promises the lowest rates wins the job.

Here's the piece most analysts are missing, but Trump missed: He argues that immigration has stopped and deportations have skyrocketed, implying that the US population is actually decreasing.

Why is that critical? If the workforce is shrinking, the "weakness" of the labor market we see in the headlines is exaggerated. The market is structurally tight.

• The Policy Error: If the new president of the Fed (chosen by Trump) cuts interest and expands the balance sheet of the central bank in a labor market that is already tight (for lack of people), the result is not growth. The result is Explosive Salary Inflation.

The 4.5% Warning Signal (Yikes!)

We don't have to guess if inflation is a concern. The American consumer is already screaming that. Note the Michigan University Inflation Expectations chart: expectations remain incredibly high in the 4.5%.

That's dangerous. When the expectation of inflation breaks down (as now), any additional stimulus acts as gasoline in the fire. The Fed should be tighting, not injecting liquidity via T-Bills purchases.

If this dynamic is confirmed — Fed stimulating, Trump pressing for low interest and tight labor market — we will see an attack by the "Security Watchers" (Bond Vigilantes).

1. Long-term bond income (10 and 30 years) will go up because no one will want to hold American debt with real negative interest.

2. That means the Fed You've lost control. the long end of the interest curve.

3. Checkmate: To prevent debt interest from breaking the government, the Fed will be forced to implement the Quantitative Easing (QE) Open and Total.

This is when inflation ceases to be a "peak" and becomes a gigantic tsunami.

The market is sleepwalking towards an inflationary precipice. The combination of monetary populism (low interest at any cost) with labour supply restriction is the classic recipe for the stagflation or hyperinflation of assets.

Recommendation: Is your portfolio ready for explosive Yields and Dollar devaluation? Finite assets (Gold, Real Estate) in the long run are the only protection when the Central Bank becomes politically captured.

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Igor Pereira Your ExpertFX School Financial Market Analyst