Negative Federal Reserve: Connive at Wild Inflation

The uptrend of CPI and broader inflation are inevitable because of the continuous growth of oil prices recently. The escalating inflation should have fueled the increase of bond yields whereas the U.S. 10-year government bond yields have dropped recently, which is bewildering. The phenomenon is believed to be associated with the anxiety of the financial market over inflation.

The plummet of bond yields is affected by the growth of bond prices while the increase of price differences is a result of capital inflow. However, the American stock market hasnt seen the plunge recently. In fact, the U.S. bond yields have commenced falling back after reaching the peak since April even reduced the USD to being weak from strong. The situation has led gold prices and non-American currencies to rallies at different levels. Therefore, the trend of the U.S. bond yields will absolutely influence the performance of gold exchange rates. It is believed that the decline of the U.S. bond yields is caused by the following reasons.

The Treasury Department of the U.S. needs to tackle the impending hefty expenditure on the Budget via massive financing, thus selling government bonds at a large scale. The behavior inflicts pressure on bond prices to some extent. However, government bonds sold by the Treasury this time have embraced a satisfying performance, which is surprising. Owing to this, bond prices have been boosted and led the U.S. bond yields to a trough at 1.4720%. Purchasing government bonds on a spree, investors are believed to be upset about the high inflation worldwide that may have adverse impacts on the economic recovery, thereby buying bonds and gold to get themselves prepared for the worst when enveloped by their anxiety about the severe inflation.

Against the backdrop of the rallies embraced simultaneously by bond prices and gold prices since early April, worries for investors about the escalating inflation mainly originate in two aspects. On one hand, the prices of commodities, especially oil prices, have been increasing continuously. On the other hand, the Federal Reserve (Fed) has turned a blind eye to the increasingly severe inflation and its consequences with the steady release of hawkish messages, which makes people think that the philosophical monetary policies made by the Fed will finally lead the American inflation to wildness. The issue is negatively coped with by the Fed officials headed by Powell though Yellen, the U.S. Secretary of the Treasury, has vaguely reminded the Fed twice of interest-rate hikes in response to inflation as soon as possible recently. As such, the Fed has become inferior when compared to other central banks that have embarked on delisting and announced that interest rates will be increased in the future.

The implication of Yellens view on interest-rate hikes conducive to the Fed is that it may be harmed by the absence of this increase. In my opinion, the message she tried to convey is that the tenure of Powell may not be renewable in early February next year if he clings to a delay in increasing interest rates. Biden and Yellen are possible to find a candidate whose comments are more hawkish to replace Powell as the chair of the Fed if they are not satisfied with his performance.