Fed dodging bullets

Monthly Consumer Price Index numbers for this month revealed a 0.2% increase month on month for both CPI and core CPI matching estimates and represents the smallest consecutive monthly advance in more than 2 years. Year on year, CPI rose 3.2%. Stock markets were range bound on the week to slightly lower.

Inflation has not reached the targeted 2% year on year number, but it has given the appearance of stabilizing in the past several months without seeing a sharp pullback in the economy. For now, the Federal Reserve has managed to pull a rabbit out of its hat.

There will be items of concern going forward, the first of which could be the recent rise in energy prices. Core CPI does not include food and energy prices as they can exhibit large amounts of volatility. They are also the most difficult items for the Fed to deal with when attempting to regulate the system. Another potential difficulty facing the Fed that will largely be out of their control is U.S. debt.

The U.S. credit rating was downgraded this week from AAA to AA+ by Fitch Ratings. Reasoning for the downgrade ranged from expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance relative to “AA” and “AAA” rated peers. A downgrade from one agency isn’t a direct hit, but it should classify as a warning shot, and it shouldn’t come as a surprise, which might be the most alarming part.

Of the three major credit rating agencies the only other downgrade of U.S. credit happened in August of 2011 when Standard and Poor (S&P) downgraded the U.S. rating from AAA to AA+ giving similar reasons as Fitch.

My memory might deceive me on this, but at the time it wasn’t necessarily a shock, either. However it felt like a big deal. This latest downgrade doesn’t seem to carry the same weight as it comes at a time when so much has happened that any news event that should be taken seriously has to battle a numbness in the system post COVID-19 to get people or governance to care.

Hopefully that is an inaccurate take because somebody is going to need to care for things to get better.

Have a comment or question? Please reach out to derrick.hermesch@pinion.global.com

Opinions are solely the writer’s. Derrick Hermesch is a commodity futures broker with Pinion. He can be reached at 785-338-9605. This is not a solicitation of any order to buy or sell any market.