As you can see in the chart above, these ranges are associated with major market crises, policymaker intervention, policy change (via elections/votes) and market liquidity crises.
The past two, however, have come as the result of an inflation report (and have come in consecutive months)!
What do we make of it?
Remember, high inflation environments, historically, have only been resolved when short term rates (the rates the Fed sets) are raised above the rate of inflation. The Fed remains well below the rate of inflation.
Why? As we’ve discussed along the way of this Fed tightening path, even if the U.S. economy (including our government’s ability to service its debt) could withstand the pain of high interest rates, the rest of the world can’t. And we’re already seeing, at current interest rate levels, that the global financial system can’t withstand it.
That’s why this 4% level in the 10-year yield seems be a vulnerable point. And that’s why this inflation report, has become the equivalent of a major market moment in recent history.
The good news, as we discussed yesterday, some of the hot spots in the inflation report, are cooling (new cars and rents), though it didn’t show in today’s report.
If fact, even if prices continued to move at the pace of the past three months (the three-month average monthly headline inflation) we’re looking at an inflation rate that is running around 2% annualized — which is the Fed’s inflation target.
And if that’s the case, we could be looking at a collapse in inflation by next year, as most of the effect of the 300 basis points of tightening has yet to be felt in the economy (still lagging).
So, how would 2% inflation be possible (much less lower), if the Fed Funds rate is still (at the moment) well below the 8.2% current annual inflation rate that we see in the media reports (which measures prices now against prices of a year ago)?
Arguably, the Fed has done its job, slowing the economy and lowering inflation (which is showing up in the monthly inflation change). They’ve done it by destroying confidence and destroying stock market wealth. And that’s been accomplished mostly through tough talk.
Why is that good news? Perhaps the pain has already been inflicted, on the stock market and the bond market.