“The Fed’s worst nightmare has begun”: Kobeissi

The US Federal Reserve (Fed) faces a critical scenario that the financial newsletter The Kobeissi Letter describes as “the Fed’s worst nightmare.”

According to his analysis, multiple inflation metrics have started to rebound at the same time that the labor market shows clear signs of weakening, a cocktail reminiscent of the stagflation of past decades.

For the first time since September 2022, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) in the United States register simultaneous increases.

“Although the Federal Reserve thought inflation was heading toward its 2% target, this is clearly not the case,” Kobeissi notes.

This has led to, since April 2023, core CPI inflation rates are once again above 3%as seen in the following graph.

Although the Fed expected inflation to decline towards its 2% target, the picture is different, as inflation has stabilized at higher levels.

However, everything indicates that the Fed will continue to cut interest rates, just as it did last September and in November. These are the first Fed cuts in more than four years since March 2020which cuts off the agency’s prolonged aggressive monetary policy.

Meanwhile, Mortgage rates have reached 7% and could exceed 8% in the near future, reflecting the impact of interest rate cuts, including an unexpected 50 basis point one in September.

The weakening of the labor market is another alarming factor. Jobs in temporary help services, considered a leading indicator of unemployment, have fallen by 145,800 positions in the last 12 months, reaching their lowest level since October 2020.

“This trend has persisted for 23 consecutive months, the longest period since 2008,” the report added.

The shadow of stagflation

In this context, the words of Fed Chairman Jerome Powell on May 4, 2024 take on a disturbing tone.

When asked about the possibility of stagflation, Powell responded that he “didn’t see stagflation.” However, the facts seem to contradict this: prices rise, unemployment rises and the economy shows clear signs of slowdown.

Stagflation, defined as a combination of high inflation and high unemployment, puts the Fed at a crossroads. If interest rates rise, the recession intensifies; If they lower them, inflation could get even more out of control.

Uncertainty is already reflected in the bond and commodity markets, with abrupt movements that could extend to the stock market in 2025.

This panorama worries both investors and consumers, who see their confidence in the economy eroded as interest rates continue to rise.

“If we see another wave of inflation in 2025, we could be in a similar situation, but probably not as serious as the 1980s.”

The Kobeissi Letter, financial newsletter.

Bitcoin as a strategic alternative

In the midst of this storm, an unexpected proposal arises: the creation of a Bitcoin Strategic Reserve.

This concept, promoted after Donald Trump’s recent victory in the presidential elections, seeks to stabilize the economy by incorporating bitcoin as a strategic asset, as reported by NoticiasVE.

With supply limited to 21 million units, bitcoin is inherently anti-inflationary. According to Zack Shapiro, policy director at the Bitcoin Policy Institute, its inclusion in US reserves would strengthen the dollar, would stabilize its exchange rate and strengthen its position as a world reserve currency.

In addition, bitcoin would complement traditional assets such as gold and foreign currencies, offering a unique advantage by not being linked to geopolitical risks or to the stability of any economy.

A path towards financial innovation

The Exchange Stabilization Fund (FSE) is emerging as a key tool to materialize this idea. Although bitcoin does not fit directly into the current legal categories of the ESF, could be acquired through financial instruments designed specifically for this purposecomplying with current regulations.

Adopting bitcoin would send a clear message to the world: the United States is committed to innovation and fiscal responsibility, which could attract foreign investment and consolidate its leadership on the global scene.

The combination of persistent inflation, a weakened labor market and economic uncertainty they draw a complicated horizon for the Federal Reserve.

As the ghosts of stagflation loom, bold proposals like the Bitcoin Strategic Reserve could offer a new path to stability. Time will tell if the United States manages to adapt to these challenges or if, as in the 1970s, it will face one of the most severe crises in its recent history.