The Federal Reserve has embarked on its 0.25% interest rate rises that may include a pause in 2023. Energy costs have fallen dramatically since March 2022, thus inflation has also dropped. The Fed does appear to be behind the curve with its rate cycle.
The markets are showing up one thing in light of the light on Federal Reserve interest rate hikes that in all realism should be over 5% by now; that speculation (NASDAQ index) is catching up to the cyclical and reflation trades which have held steady as expectations in inflation had declined from spikes in energy prices, that in turn began to offer an indication inflation had indeed peaked. Rate increases by the U.S. Central Bank appear to have settled under 5%, as they resort to the expected 0.25 % throughout 2023, which may include a pause at some point. Yes, they're, the Fed, will probably not cut rates this year, so the loan and credit markers re: housing and consumption will continue to feel the squeeze.
The NASDAQ has rallied over 12% since its 2023 January low, pricing in the Fed low rate/s for 2023 and falling yields, namely the 10 YR, as you can see with Chart 1. The yield on the 10 YR has collapsed on the 23rd January (blue vertical line) when the NASDAQ began to rally, falling over 10% to the current rate at 3.41% (bar chart). As discussed in this post, this places speculation firmly back on the table in with the masses of job cuts the tech sector is embarking on for cost cutting, what will be interesting to see is the demand in wage rises for a sector heavily indebted and reliant om a low rate environment.
Chart 2. Shows the U.S. inflation rate since 1982 when inflation began to decline, yet the interest rates were well above 5% (blue line). We are still at a 40 year high of persistent inflation and interest rates are still below the Fed's terminal rate/s which could lie between 5% and 10%.
Chart 3. Shows a closer viewpoint of the vertical blue lines (oil and the inflation rate) and how significant the March 2022 SPR oil drawdown had on the U.S. inflation rate, as oil started to decline so did inflation.
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