Over the last few days, I’ve been outlining why the Fed is going to be forced to taper its monetary interventions.

By quick way of review, market internals are signaling a correction is coming. The most likely trigger for this will be the Fed announcing it has to taper its current $120 billion QE program based on the fact inflation is ripping through the financial system.

As I noted yesterday, Fed officials have been posturing that inflation is “transitory” to buy themselves time, but the reality is that on some level the Fed is fully aware this is a lie.

How do we know this is a lie?

Because the Fed’s Beige Book is SCREAMING that inflation has arrived.

If you’re unfamiliar with the Fed’s Beige Book, it’s a report the Fed publishes eight times per year. In it, the 12 regional banks that comprise the Federal Reserve banking system (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco), present anecdotal information on the U.S. economy.

Think of the Beige Book as the Fed’s attempt at “outreach” through which it gives business contacts and others the ability to tell the Fed what they are experiencing in the real world.

We know from the March Beige Book that the Fed was well aware that inflation is a MAJOR problem for the economy, as the following statement from that release reveals: “businesses in most sectors expect fairly widespread increases in the prices they pay in the months ahead…”

And Now?

So, what about this month? Are things improving as far as inflation is concerned?

Not in the slightest. In fact, the May Beige Book shows that the Fed’s contacts are SCREAMING about inflation.

Amongst the highlights:

• Strengthening demand, however, allowed some businesses, particularly manufacturers, builders, and transportation companies, to pass through much of the cost increases to their customers.

• Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months.

• On balance, overall price pressures increased further since the last report.

• Unlike in prior quarters, firms now expect general consumer inflation to be even higher than firm prices.
  Source: Federal Reserve

So, in a nutshell, the May Beige Book is showing that inflation has become even more pronounced. Indeed, as the final point reveals, inflation is now DEEPLY embedded in the financial system.

There is no way the Fed can ignore these signals… which means it will be tapering its interventions sooner rather than later.

Best Regards,

Graham Summers
Editor, Money & Crisis