The Fed is ready to “inflict pain” on the economy to bring inflation down; stocks, Bitcoin to see more decline – Alfonso Peccatiello

The Fed will “inflict pain” to bring inflation down to 2%, said Alfonso Peccatiello, author of The Macro Compass. The resulting central bank policy will negatively affect stocks and cryptocurrencies.

In his Aug. 26 speech in Jackson Hole, Federal Reserve Chairman Jerome Powell struck a hawkish tone, saying lower inflation “will hurt households and businesses.”

“Those are pretty strong words for a decision-maker,” Peccatiello said. “What he means is that the Fed won’t stop until the job is done. The job means inflation is back to 2%.”

Peccatiello added that the effect of Fed policy on “risky assets” like stocks and crypto could be disastrous.

“[The Fed] must maintain their tight monetary policy,” he said. “When real returns are high, every investment you make becomes, from a valuation perspective, less attractive.”

Peccatiello spoke with David Lin, presenter and producer at Kitco News.

The Fed’s lack of credibility

Powell’s speech in Jackson Hole means the Fed is trying to regain credibility after failing to keep inflation around its 2% target, Peccatiello said. This means the Fed will not “pivot” and cut rates until “the job is done”.

US inflation is currently 8.5% in July.

“You don’t regain credibility by moving the goal post,” he added. “The goal post is 2 percent [inflation].”

Powell had previously signaled that he wanted real yields to rise, which would make it harder to borrow capital. After Powell’s speech in Jackson Hole, five-year real yields, which are nominal yields minus inflation expectations, turned positive.

“We’re talking about positive real returns of nearly 1% in the US,” Peccatiello said. “[Powell] achieved this goal, which gives it credibility.

Peccatiello said Powell would hit his 2% inflation target “if he inflicts enough pain on the private sector…The bond market is pricing with a decent probability, around 35%, that the fed funds rate will drop to 4%” .

The Winter of Discontent in Europe

As the Fed struggles to control inflation, Europe grapples with soaring energy prices. Europe’s benchmark electricity price was up 10 times the decade average, and natural gas prices hit €321 ($321) per MWh, up from €27 ($27) per MWh one year ago.

It comes as Russia shut down the Nord Stream 1 gas pipeline for maintenance. Russia supplies 40% of the natural gas needs of the European Union.

“About 7 to 10% of [Europe’s] The GDP bill comes from electricity, energy and gas during the winter,” Peccatiello said. “It’s extremely big. We’re talking about a cost as big as a banking crisis in Europe… I think, basically, Europe will barely make it through the winter at a very high price.

He added that in the long term, Europe will have to change its energy model, “to ensure that it has other sources of energy to continue to deliver and produce goods that it can export”.

For Peccatiello’s outlook for stocks and Bitcoin, watch the video above

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