The Fed meets tomorrow on policy.
Following Friday's hot inflation report, the market has now priced in a more aggressive 75 basis point rate hike for tomorrow.
That would take the effective Fed Funds rate to 1.5%.
The problem is, as we discussed last month, there are three supply issues that are driving inflation, that the Fed's interest rate ammunition can do nothing about.
1) The reset of wages at the low end of the scale. Thanks to pandemic unemployment subsidies, the government established a new (higher) living wage. That's being passed on to consumers through higher prices.
2) The global supply chain disruptions from the lockdown period have been exacerbated by war in eastern Europe and zero covid policies in China.
3) High energy prices, sustained by a self-inflicted supply shortage, by the design of global anti-fossil fuel policies.
These factors will keep a fire under prices, regardless of whether the Fed sets interest rates 50, 75 or even 100 basis points higher.
From this point, a more aggressive rate path will ensure a lower quality of life, more so than it will ensure lower prices.
And that is being projected in this chart …