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Fed is in denial about ‘persistent’ inflation, Wall Street forecaster Jim Bianco warns

Fed is in denial about ‘persistent’ inflation, Wall Street forecaster Jim Bianco warns

02 Nov 2021

Market forecaster Jim Bianco expects inflation’s intensity to catch up with central bank policymakers worldwide, including the Federal Reserve.

The fallout could make stocks less attractive, and knock them off record highs.

“Inflation is persistent and you’ve got to start thinking about moving your policies more aggressively towards tightening,” the Bianco Research President told CNBC’s “Trading Nation” on Tuesday. “None of these central banks want to do that. They’re in denial that the markets are telling them that.”

Bianco points to trading activity in bonds.

“What’s happened in the markets in the last couple of weeks is short-term interest rates have moved up and moved up a lot especially in countries like Australia and New Zealand,” he said. “They’re saying that you’re behind the curve.”

According to Bianco, it’s evidence inflation is widening its grip across the globe. He contends it’s tough to just pin it on temporary supply chain issues.

Bianco lists wide-ranging issues from surging food and commodity inflation to wage growth as tell-tale signs the backdrop isn’t changing anytime soon.

‘Everywhere you turn prices are up’

“Everywhere you turn prices are up, and they’re going higher,” he said. “The Fed likes to use the word transitory. But every day it looks less transitory, and to use the opposite word more persistent.”

He doubts Fed Chair Jerome Powell will open a Pandora’s Box during Wednesday’s decision on interest rates by sounding hawkish. However, Bianco believes the Fed warns hikes will likely come sooner than economists and investors anticipate.

“If the market stay at these high interest rate levels on the short-end of the yield curve signaling that they should be moving faster, they’ll [the Fed] eventually come around to accepting that,” said Bianco. “You’re going to start to see more aggressive rate hikes in 2022 than most are giving credit for right now.”

At the moment, Bianco suggests the stock market is in a sweet spot. He sees retail investors vigorously putting money in stocks through year-end.

“You’ve got huge amounts of cash in accounts after 18 months of stimulus and people not spending money,” he said. “So, they’re figuring out ways to invest their money. Well, welcome to 2021. There’s really only one investment, and that is to buy an index ETF probably based on the S&P 500 like SPY [SPDR S&P 500 ETF Trust].”

But it appears the bullish activity would have a shelf life.

“If interest rates continue to head higher, and continue to put pressure on central banks and they kind of buckle and say ‘Maybe we ought to start thinking about persistent inflation in raising rates.’ Then, the market can be vulnerable,” Bianco said. “That’s probably not a story until next year. Maybe the first quarter.”

On Tuesday, the S&P 500, Dow and tech-heavy Nasdaq closed at all-time highs.