Last week’s policy shift from the Fed brings uncertainty about the future of inflation, which has lingered below the Fed’s 2% target since 2012. Weak inflation is partially attributable to a dramatic decrease to the velocity of money, which has only slowed further since the onset of the Covid-19 crisis. Meanwhile, the manufacturing recovery continues as the sector closes out its third consecutive month of expansion, though increased production has not yet sparked a commensurate rise in hiring. Finally, we’re keeping an eye on EM, global markets, and the beleaguered U.S. agricultural sector, where the sinking USD could potentially spark some long-awaited movement.
1. Long-term inflation expectations continue to creep higher. The new Fed policy of 2% average inflation means that the Fed will allow higher than 2% inflation to “make up” for years of sub-2% inflation. With trillions of new debt and record federal deficits, will this scenario allow inflation to overheat? Sorry, I’m a child of the 1970’s…
![9.2 Long term inflation expectations continue to creep higher-2](https://blog.investbcm.com/hs-fs/hubfs/9.2%20Long%20term%20inflation%20expectations%20continue%20to%20creep%20higher-2.png?width=495&name=9.2%20Long%20term%20inflation%20expectations%20continue%20to%20creep%20higher-2.png)
Source: The Daily Shot, from 9/1/20
2. One culprit to the low inflation is the velocity of money, or the rate and speed money is exchanged in the economy. The M2 velocity is currently 1/2 the rate of the 1990’s…
![](https://blog.investbcm.com/hubfs/9-2%20One%20culprit%20to%20the%20low%20inflation%20is%20the%20velocity%20of%20money-png.png)
Source: The Daily Shot, from 9/1/20
3. Is this encouraging print due to pent up demand or is the housing rally and other economic activity really on track?
![](https://blog.investbcm.com/hubfs/9-2%20Is%20this%20encouraging%20print%20due%20to%20pent%20up%20demand%20or%20is%20the%20housing%20rally-png.png)
Source: The Daily Shot, from 9/2/20
4. Another regional Fed report showing “all is well”…
![](https://blog.investbcm.com/hubfs/9-2%20Another%20regional%20Fed%20report%20showing-png.png)
Source: The Daily Shot, from 9/2/20
5. Manufacturing employers are taking a cautious approach…
![](https://blog.investbcm.com/hubfs/9-2%20Manufacturing%20employers%20are%20taking%20a%20cautious%20approach-png-1.png)
Source: The Daily Shot, from 9/2/20
6. Depending on the industry, some jobs are just going to be lost…
![9.2 Depending on the industry, some jobs are just going to be los-2](https://blog.investbcm.com/hs-fs/hubfs/9.2%20Depending%20on%20the%20industry,%20some%20jobs%20are%20just%20going%20to%20be%20los-2.png?width=601&name=9.2%20Depending%20on%20the%20industry,%20some%20jobs%20are%20just%20going%20to%20be%20los-2.png)
Source: The Daily Shot, from 9/2/20
7. The markets continue with the “one-man band”…
![](https://blog.investbcm.com/hubfs/9-2%20The%20markets%20continue%20with%20the-png.png)
Source: The Daily Shot, from 9/2/20
8. Will the US Dollar’s decline finally give EM and DM markets a long-awaited tail wind?
![9.2 Will the US Dollars decline finally give EM and DM markets-2](https://blog.investbcm.com/hs-fs/hubfs/9.2%20Will%20the%20US%20Dollars%20decline%20finally%20give%20EM%20and%20DM%20markets-2.png?width=596&name=9.2%20Will%20the%20US%20Dollars%20decline%20finally%20give%20EM%20and%20DM%20markets-2.png)
Source: Haver Analytics, Federal Reserve Board, Goldman Sachs, from 9/1/20
9. Will the weaker dollar finally give U.S. farmers a break?
![9.2 Will the weaker dollar finally give U.S. farmers a break-3](https://blog.investbcm.com/hs-fs/hubfs/9.2%20Will%20the%20weaker%20dollar%20finally%20give%20U.S.%20farmers%20a%20break-3.png?width=615&name=9.2%20Will%20the%20weaker%20dollar%20finally%20give%20U.S.%20farmers%20a%20break-3.png)
Source: The Daily Shot, from 9/2/20
10. Europe’s CPI has turned back to deflation…
![](https://blog.investbcm.com/hubfs/9-2%20Europes%20CPI%20has%20turned%20back%20to%20deflation-png.png)
Source: The Daily Shot, from 9/2/20
11. Inflation is muted in Europe and some other major economies. Imported inflation does not seem to be a current issue
![9.2 Inflation is muted in Europe and some other major economies.-2](https://blog.investbcm.com/hs-fs/hubfs/9.2%20Inflation%20is%20muted%20in%20Europe%20and%20some%20other%20major%20economies.-2.png?width=636&name=9.2%20Inflation%20is%20muted%20in%20Europe%20and%20some%20other%20major%20economies.-2.png)
Source: Eurostat, Bloomberg Survey of Economics, as of 7/31/20
12. This year the federal government is going to create new debt of almost $12,000 for every man, woman and child in the U.S.
![9.2 This year the Federal government is going to create new debt-2](https://blog.investbcm.com/hs-fs/hubfs/9.2%20This%20year%20the%20Federal%20government%20is%20going%20to%20create%20new%20debt-2.png?width=613&name=9.2%20This%20year%20the%20Federal%20government%20is%20going%20to%20create%20new%20debt-2.png)
Source: Manhattan Institute, as of 1/2020