Recession on and Stagflation off 2022 trades have returned, as the market tries to gauge the Fed's next move. The likelihood of rates surpassing 5% in the U.S. is more of a reality than not, even if unemployment begins to tick up in 2023.

Markets are beginning to play the redux of recession on/stagflation off trades ala 2022, attuned by its reliance on Federal Reserve Bank and its institualization of market participation, in meaning, that low % rates on money fuels speculation and/or venture capitalist NASDAQ startups.  So, when there is the slightest whiff of the possibility that the Fed will begin to slow, pause and even cut rates the market will rally in earnest, particularly the NASDAQ.   Of course the same occurs but in reverse when there is a hint that inflation has become imbedded into the American economy, markets sell off.

Refer to the chart above which shows Personal Consumption Expenditures (PCE) as the green bar chart and M2 money supply (green line) with the white line being U.S. interest rates at 4.5%, which is trailing the PCE spike (The Fed's preferred inflation gauge).   That at this point, is not showing signs of coming down from its multi decade highs, particularly the dramatic incline after the 2020 global shutdown for COVID-19.  Also note U.S. unemployment, orange line, at 10 year lows of 3.4%.  This certainly also does not paint a picture of a recession or a coming recession.  The market maybe mispricing the current interest rates, which are still below the 5% and 6% so called terminal rate, in its fear that it will send the U.S. into a recession.

The separate chart below shows the Fed's balance sheet, which is still at over 8 Trillion, that equates to a lot of cash related assets sloshing around within the American economy.  And while the Fed has been slow in reducing their balance sheet since hiking rates, it does signal to the market that the U.S. Central Bank  has had a reluctance in slowing down the American economy in any dramatic way.  Otherwise we would have seen a vastly more dramatic reduction of the Fed's balance sheet and rates would have been at 5% or even 6% by now.