Hyperinflation Won't Happen in US | Influencer‘s Insight •Jasper Lo

The Federal Reserve changed its pessimistic attitude towards the economy after the meeting. It dialed up its economic growth expectations from 4.2% to 6.5% and saw inflation running to 2.4% this year, above its previous estimate of 1.8%. The two sharp rises are conducive for the stock market and the 10-Year Treasury yield, respectively. With all eyes in the financial market turning to the Treasury yield this year, it has been surging thanks to the economic recovery, which drives capital to flow from bonds to stocks, as well as to Biden's economic stimulus and infrastructure program, which call for bond issuance in a large size. At the same time, the soaring inflation, which is benefited from the spiking commodity price, also fuels the Treasury yield. At present, higher inflation is not merely speculation of the financial market, but an expectation of the Fed.

Former Treasury Secretary Summers said Biden's bailout measures were immediate rescue and feared the aggressive plan could cause a damaging inflation spike. I believe what he worried about is potential hyperinflation, which happened only twice worldwide after the Second World War, namely the 1973-1974 Arab-Israeli War and the 1979-1980 Iran hostage crisis. They both triggered the oil crisis at the time. What's more, the fed funds rate spiraled from 3% to 13% during 1972-1974 and exploded from 5% to 20% during 1976-1980. These records teach us that the oil spike will lead to hyperinflation, but the thing is, whether oil prices will swell like the last two times.

On the contrary, I believe the chance for oil to embrace a plunge is considerably larger than that to see a spike. The current energy market is no longer the one under monopoly. There have been various substitutes for oil, greatly reducing the chance of an oil price hike. Therefore, Biden and Yellen will ignore Summers' suggestion. Not only are they calm to the potential hyperinflation, but they also regard moderate inflation as a favorable factor to the country. Thus they won't scale down the stimulus package or infrastructure plan. In this case, the financial market starts betting on the Fed's early tightening on monetary policy. But keep this in mind, it will be processed in order by the market exit, rate hike, and balance sheet unwinding. These speculations will bode well for the dollar. Besides, the European Central Bank explicitly stated that it would accelerate the pace of bond buying in the second quarter to dampen the long-term bond yields. In other words, the central banks in the US and Europe tend to launch monetary policies in opposite ways. With the impact of their different policies, as well as the widening US-EU yield spread, USD/EUR will find its boom on the cards.