Deltec Think About This Will Repression Hit The Inflation Target?

Think About This INVESTMENT RESEARCH EFFECTIVE FED FUNDS RATE & US GOVT 10-YEAR YIELD 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 US Recessions Fed Funds Rate US Govt. 10 Year Yield CENTRAL BANK PURCHASES Sources: Bloomberg, Deltec USD Billion, 12m rolling $8.000 $7.000 $6.000 $5.000 $4.000 $3.000 $2.000 $1.000 $0 -$1.000 -$2.000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fed Purchases ECB Purchases BoE Purchases BoJ Purchases Total CB Purchases The US issues the global reserve currency, creating natural demand for its bonds. This makes a fire sale, particularly when all policy makers are on the same tack, incredibly unlikely. So, US Government bond yields are almost entirely determined by the base rate and central bank balance sheet movements. They are under Central Bank control. with vast levels of public and private debt, the biggest risk they face is a deflationary spiral. In the absence of inflation, the incentive to invest in productive assets falls. And they are not the only authorities wanting general price increases. Government’s most palatable escape from mountains of debt is to inflate it away. But inflation is not theirs to control. Measures of inflation expectations have oscillated between 0% and 2% in the last decade. This follows a drift down over the last 20 years, driven by the combined forces of globalization and technology adoption, and a step down following the GFC. This is problematic for the Fed. The world is awash So, the Fed’s discussion at the Jackson Hole forum of Central Bankers last week were no surprise. They started the review of their inflation target more than 18 months ago. They have now declared that they are happy with inflation above their 2% target for a time to make up for periods when inflation is below 2%. The message is that they are happy for inflation to run hot. www.deltecbank.com Deltec Bank & Trust Limited

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