Here are the takeaways from today's Morning Brief. sign up Every morning you will receive the following message in your inbox:
Ripples from higher-than-expected inflation rattled the bond market on Wednesday, with the US 10-year Treasury yield (^TNX) at 4.56%, its highest level since November. The rate of increase (18 bps) was the largest in about two years.
The resulting volatility spilled over into stocks, particularly interest rate sensitive areas such as real estate, utilities and local banks, with the Russell 2000 (^RUT) down 2.5%, its worst trading day in eight weeks.
The Fed has largely promised since December that a rate cut is likely in 2024, based on the assumption that price increases are moderating and moving closer to the Fed's 2% inflation target.
A closer look at the inflation numbers shows that many factors are clearly accelerating upward, including the numbers for the Fed's touted “supercore” services, which exclude shelter-related prices.
As Torsten Slok, chief economist at Apollo Global Management, pointed out to clients, while the year-over-year supercore inflation is currently running at 5%, the three-month change has jumped to 8%. Not far from the peak in early 2022. At the time, it was the highest price in 40 years. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
The Fed aims to avoid a repeat of the double inflation of the 1970s and early 1980s. To this end, in 2022 (while serving as president of the St. Louis Fed), James Bullard wrote an important public document about this bygone era of inflation.
After price inflation spiked to 12% in 1974, the Federal Reserve, led by Arthur Burns, quickly kept interest rates relatively low even as inflation rose again.
Inflation is expected to remain stubbornly above 5%, he said, adding that “inflation remains at a high and volatile level for the next 10 years.'' ”[T]The real economy has been unstable, in part because high inflation can distort price signals and hinder real economic activity. ”
In 1979, after the inflation rate exceeded 10% AlsoPaul Volcker was installed as Fed chairman to put the inflation genie back in the bottle for good.
But even Mr. Volcker got it wrong early in his tenure as Fed chairman. Less than a year into his eight-year tenure, the federal funds rate was above 20% while the CPI peaked at 15%. The Volcker Fed quickly lowered the policy rate to 9% within a few months, but in 1980 it lowered the policy rate to 20%.
The Fed has since lowered its policy rate to 16%, but the central bank has been forced to raise its base rate again to 20%, the third time in just over a year.
Finally, by 1983, inflation had subsided to a manageable 2.5%. This time, things have changed to the upside, so the Volcker Fed is gearing up.
“1983 [Federal Open Market Committee] “Governor Bullard placed more emphasis on monetary factors that influence inflation, and as a result, kept interest rates relatively high even as inflation declined.”
And while the Fed kept benchmark interest rates high relative to inflation, the U.S. economy continued to perform well.
“You might have expected high real interest rates to cause a recession, but that hasn't happened,” Bullard said.
Will it get more expensive if I continue for a long time? History rhymes.
Read the latest news about inflation and what it means for the Federal Reserve.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
