Has the Fed Already Gone Too Far? 

The huge driving narrative behind 2022 was “inflation.” Everything costs a lot more than it did just 12 months ago, and this is due to many reasons. Some of it was due to supply chain disruption carryover from the Covid era, some of it due to the Ukraine war, some of it due to rising commodity prices due to outright demand, and some more of it was attributable to the US Government passing a $1.9Trillion spending bill to “fight inflation.” 

So the US Federal Open Market Committee (FOMC), who is mandated with setting interest rate policy, finally got into gear in 2022 by raising interest rates at a meteoric pace never seen before. (this is after kicking the can down the road for the past year calling inflation “transitory.” )

The Fed Discount rate, which was essentially 0% for many years, now stands at 4.5%, and is slated to be increased yet again on the 1st of February. The problem is that the Fed might have already gone too far and acted too slowly. And if they have gone too far, then they will also act too slowly to reverse their error. It’s a pattern as old as time; the Fed is ALWAYS too late and acts too slowly. 

Let’s see this morning’s PPI report: 

The PPI, or Producer Price Index, shows supply-side inflation on the wholesale side. That monthly number just came in WELL below consensus and shows items actually in DEFLATION. 

Also this morning came the Retail Sales report: 

Retail Sales was also below consensus. The Fed has already caused demand destruction by raising rates at an astronomical pace. 

Worse yet is the bond market, who has been pricing in a REDUCTION in rates for the past four months: 

Everything that I’m seeing now shows me that we might actually see DEFLATION become the biggest problem in the next year. In the meantime, we might see a window of opportunity for risk assets to rally since competing vehicles like interest-bearing assets are declining. 

It’s a global search for yield everywhere.