Wednesday, March 27, 2013

How the Fed increases the cost of living

Is the Fed’s QE program increasing food and fuel costs for consumers?  Peter Kenny, managing director at Knight Capital Group, thinks so.  In an interview with he stated that the Fed’s QE policy is pushing up the price of fuel, which in turn raises the price for everything else in the economy.  While monthly headline inflation data is below the Fed's 2% target, Kenny and many other market watchers see it showing up elsewhere “in everything we assume is a part of our daily life.” 

According to Kenny, QE is pushing up the price by about 50% instead of the $65 a barrel level where he believes it should be based on current supply and demand.  Since the Fed is actively injecting more money into the economy, he says that has resulted in “more dollars chasing that fuel” leading to higher prices.

Kenny also sees evidence of the Fed’s intervention in the stock market.   “The soft bid we see in equity markets and that we run into every time there’s a sell-off, that soft bid is the direct result of quantitative easing.”

Few investors doubt the effects of the Fed’s stimulus efforts in boosting oil and stock prices.  Without the impact of higher oil prices the effects of the deflationary long-term cycle would be evident in every sector of the economy.  What’s debatable is how it all ends.  Will the Fed succeed in beating the 120-year deflationary cycle scheduled to end in 2014 with its QE policy?  Or will the structural forces of deflation prevail despite the Fed’s strongest efforts as we head closer to the final bottom of the cycle? 

Mr. Kress himself always believed that while stimulus could temporarily soften the blow of the cycle, no amount of central bank/government intervention could ultimately stop the Master Cycle of inflation/deflation.   It’s too early to say with any certainty that Kress was wrong but we’ll at least have a better idea just how power the Fed has over the market once we see the market’s reaction to the upcoming quarterly cycle peak.

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