by Louis Navellier

June 14, 2022

Central Banking is really easy. All you have to do is follow market rates and inflation, with a slight lag. The Federal Reserve is doing that, but the European Central Bank (ECB) has their collective heads in the sand, refusing to raise key interest rates above zero, much less follow the trend toward rising global rates.

Last Thursday, the ECB left its key interest rate unchanged at -0.5%, which is truly amazing considering that market rates have been rising and inflation in the eurozone is higher than in the U.S. In the wake of the ECB meeting, German and Italian bond yields surged, as market rates continue to rise in Europe.

The ECB said it will stop its bond buying (i.e., quantitative easing) in early July and will likely raise its key interest rate by 0.25% a few weeks later, in early August. Furthermore, the ECB also said that it would likely “raise key ECB interest rates again in September.” Frankly, the ECB is so far behind the inflation curve and market rates that they have guaranteed a weak euro, which ironically is inflationary!

Central bank protocols get a little more delicate when it comes to mixing politics with finance. The Fed has indicated that it will hike rates by 0.5% at the Federal Open Market Committee (FOMC) meetings on June 15th, July 27th,and September 21st, but then the Fed may pause raising key rates for a while. Why?  Because the next FOMC meeting is scheduled for November 1-2, a week before the mid-term election on Tuesday, November 8th. I don’t think the Fed wants to raise rates within a week of a mid-term election.

If Jerome Powell wants to further erode the Democrats’ control in Congress and Joe Biden’s presidency, all the Fed has to do is raise key interest rates on November 2nd. That’s why I bet that Chairman Powell will get a call from Treasury Secretary Janet Yellen, who will ask him to “back off” on November 2nd.

During her first year as Fed Chair, rates were “frozen” near zero, so Janet Yellen didn’t raise rates prior to the 2014 mid-term elections. But today, Biden is in deep trouble. Millions of stickers on gas pumps with a Joe Biden picture pointing to the price and saying, “I did that” are being displayed. He is beginning to resemble Jimmy Carter, as we begin to relive the 1970s stagflation (slow-to-no growth, plus high inflation) all over again.

The World Bank is now predicting that stagflation will overtake the world economy. Specifically, David Malpass, the President of the World Bank, said, “Several years of above-average inflation and below-average growth now seem likely” adding, “The risk from stagflation is considerable.” Food inflation remains a big problem that is impeding global economic growth, according to the World Bank.

Fed Vice Chairman Lael Brainard said on CNBC last week, “Right now, it’s very hard to see the case for a pause” after September. Vice Chairman Brainard added, “We’ve still got a lot of work to do to get inflation down to our 2% target.” If the Fed raises rates 0.5% at its FOMC meeting on September 21, the Federal Funds rate will be at 2.25%, up from 0.75% currently and much closer to market rates.

In other words, rates will triple from here, so a pause in Fed policy is justified after September 21st – if justified by the economic data. Since the Fed likes to “drive through the rearview mirror,” the mid-term elections should provide a good excuse to pause and monitor the impact of their aggressive rate hikes.

I can report that voters are frustrated. Early last week, I drove the nearly 800 miles from Mesa, Arizona to Reno, Nevada. At every single gas station, I saw those Joe Biden “I did that” stickers plastered on gas pumps. Countless vendors on-line are selling Joe Biden “I did that” stickers for gas pumps.

Here’s a snapshot of one gas station owner who did not want those stickers removed:

Gas Station Stickers Images

In the 1970s, the OPEC oil embargo caused some oil price inflation, but inflation was mostly due to too much money printing after President Nixon took America off gold backing in 1971. Likewise, President Biden can’t blame Putin for all of our inflation. Printing too much money for way too long – with checks sent to too many people who did not need the money – fueled most of today’s high inflation. The war in Ukraine merely pushed the headline rate slightly higher, but inflation was already rising strongly in 2021.

The Fed’s top economists and Treasury Secretary Yellen said inflation would be “transitory” all during 2021, but they must have known better. Are they still clueless? Last Tuesday, Secretary Yellen told the Senate Finance Committee, “I do expect inflation to remain high, although I very much hope that it will be coming down now.” Well, I’m sorry to say that “hope” is not a very effective inflation-fighting tool!

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Central Banking for Dummies

Income Mail by Bryan Perry
Income Mail is on Hiatus

Growth Mail by Gary Alexander
Has the Fed Finally Learned Some Lessons?

Global Mail by Ivan Martchev
Neither Bonds nor Inflation Are Cooperating

Sector Spotlight by Jason Bodner
“Where Does the Pain Hurt Most?”

View Full Archive
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Louis Navellier

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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