Hedge-fund Founder Einhorn Says the Fed Can’t Control Inflation

"The Federal Reserve Is Bluffing and Ignoring Inflation"

Many researchers, professionals, and market players are afraid that the present inflationary pressures will not diminish with the announcement of the Consumer Price Index by the US Bureau of Labor Statistics tomorrow and the FOMC meeting next week. They also fear that the Federal Reserve's measures, such as hiking interest rates to curb demand, will not be sufficient to manage inflation.

Members of the Federal Reserve have recognized the limitations of the instruments at their disposal for addressing inflationary concerns. Raising interest rates to reduce demand will not solve the underlying problems that have led to inflation reaching 40-year highs. Supply chain bottlenecks and excessive fiscal expenditures by the US government are the key sources of contemporary inflation.

David Einhorn, the founder of Greenlight Capital, is a strong supporter of this viewpoint. Einhorn offered his thoughts in a lecture at the all-virtual Sohn Investment Conference in 2022, in which he cautioned that inflation would most certainly be persistent and heated. He also warned that the Federal Reserve's measures to reduce consumer demand by boosting interest rates would exacerbate rather than alleviate the crisis.

"David Einhorn said on Thursday that the Federal Reserve is pretending it can contain inflation and that gold is likely to move higher despite the present climate of increasing prices," according to Reuters.

Einhorn used the fact that the "Fed is bluffing and not combating inflation" as a basis for his assumption that gold prices will rise "under the present context of increasing prices" in his speech. His idea was that increased interest rates would lead to a rise in the national debt, making aggressive rate increases unsustainable.

"The concern is whether there is sufficient gold to support currency reserves." The remedy is for gold's price to rise, maybe dramatically."

At next week's FOMC meeting, the Federal Reserve is likely to announce another half-percentage-point rate rise. The likelihood that the Federal Reserve will increase rates by half a percent next week is 95.8%, according to the CME's FedWatch tool, and the probability that this will be followed by another half-percentage-point boost at the July FOMC meeting is 78.3 percent.

The CPI data due out tomorrow is expected to reveal a strong 0.7 percent rise, which would be twice as high as April's gain. In May, the Bureau of Labor Statistics reported a minor decrease in inflationary pressures, from 8.5 percent to 8.3 percent, the first drop in eight months. This would increase the CPI index from 8.3 percent to 8.4 percent, suggesting that inflation is still exceptionally strong and persistent.

Today's Gold and Future Prospects Following the CPI data, gold dealers and investors have maintained a wait-and-see approach as they anticipate tomorrow's news and the FOMC meeting next week. If tomorrow's CPI data reveals that inflation is still persistent and that the Federal Reserve's recent actions haven't stopped it, the wait-and-see attitude toward gold might soon shift.