By: Russ Kamp, Managing Director, Ryan ALM, Inc.
The US equity and bond markets rallied significantly yesterday. Why? What changed from last Friday, last week, last month, last quarter, or year-to-date? The US continues to live with excessive inflation and the US Federal Reserve continues to say that it is committed to raising the Fed Funds Rate until they have accomplished its objective of driving inflation down and creating price stability. They are motivated by not wanting to risk a repeat of the Fed’s two-step in the 1970s!
Inflation will not be contained until demand for goods and services is weakened. Have they impaired the consumer at this point? No, if one looks at the following graph from the Daily Shot.
The US consumer continues to be employed and they are spending what they’ve earned. It certainly doesn’t seem like anything has changed since last week other than the calendar flipped, and we are now in October bringing with it the first day of trading in 2022’s fourth quarter. Federal Reserve Vice Chair Lael Brainard said the “US central bank will need to keep interest rates high for some time to bring inflation down”, even as she acknowledged the need to watch global financial-stability risks from rising borrowing costs.
The global financial markets have benefitted tremendously from the incredible tailwind of accommodative Fed policy for nearly four decades. Have we forgotten that there are risks associated with “investing”? Believing that interest rates and inflation were always going to be low was a critical mistake. We are now paying the piper.
Good question Russ: What changed? The herd stampeded, again. Do you think we’ll ever recognize that the Fed is simply easing up on its manipulation of bond prices — ZIRP (Zero Interest Rate Policy). Price manipulation can’t be good in the long run, yet the market believes the Fed will “pivot”, the buzz word for restarting manipulation. In other words, the market actually believes that manipulation is good — hah!
Hey Ron – Good morning. Most members of the investment management community have only witnessed the Fed step into the fray when there was trouble in River City! They don’t know or appreciate what transpired during our last cycle of significant inflation and rising rates. They will soon come to realize that the Fed is NOT going to pivot until they have actually accomplished something.
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