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Hedge-fund founder Einhorn says the Fed can’t control inflation

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With tomorrow’s release of the Consumer Price Index by the U.S. Bureau of Labor Statistics and next week’s FOMC meeting many analysts, experts and market participants are extremely concerned that the current inflationary pressures will not subside. More so, they believe that the tools available to the Federal Reserve will not control inflation by raising interest rates to reduce demand.

Federal Reserve members have acknowledged the shortcomings of the tools available to them to have a real impact on inflationary pressures. Simply raising interest rates to lower demand will not address the primary underlining issues that have led to inflation at a 40-year high. The primary causes of current inflation are supply chain bottlenecks and excessive fiscal spending by the U.S. federal government.

A major proponent of this view is Greenlight Capital founder David Einhorn. In a speech at the 2022 all-virtual Sohn Investment Conference Einhorn presented his views in which he warned that inflation would most likely continue to be persistent and hot. He also stated that the actions of the Federal Reserve to lessen consumer demand by raising interest rates will aggravate the situation rather than combat it.

According to Reuters, “David Einhorn said on Thursday that the Federal Reserve is pretending it can tame inflation and that the price of gold is likely to go higher amid the current environment of rising prices.”

In his speech, Einhorn said that the “Fed is bluffing and not fighting inflation” as a basic foundation for his belief that gold prices would move higher “amid the current environment of rising prices”. The foundation for his assumption was that higher interest rates will also cause the national debt to increase making aggressive rate hikes unsustainable.

"The question is whether there's enough gold to back the currency reserves. The answer is for the price of gold to go higher, perhaps much higher."

The Federal Reserve is expected to announce another half a percent rate hike at next week’s FOMC meeting. According to the CME’s FedWatch tool, the probability that the Federal Reserve will raise rates by half a percent next week is 95.8% and the probability that this will be followed by another half a percent rate hike at the July FOMC meeting is 78.3%.

Tomorrow’s CPI report is forecasted to show a large 0.7% increase, which would be a gain twice as large as the report in April. In May the BLS reported that inflationary pressures decline slightly from 8.5% to 8.3% the first decline in eight months. This would take the CPI index from 8.3% to 8.4% clearly indicating that inflation continues to remain extremely high and persistent.

Gold traders and investors have maintained a wait-and-see attitude recently as they await tomorrow’s report and next week’s FOMC meeting. If tomorrow’s CPI report shows that inflation continues to be persistent and recent action by the Federal Reserve has not stifled it that wait-and-see attitude towards gold could quickly change.

As of 6 PM EDT gold futures basis, the most active August 2022 contract is currently trading at $1850.70 down $5.80.

Wishing you as always good trading,

Gary S. Wagner - Executive Producer