The release of the CPI inflation report last week showed that inflation rose 0.4% for September, according to the Bureau of Labor Statistics.
The report also showed that the consumer price index in September tanked 0.1% at 8.2% YoY from the previous month's 8.3% YoY. However, the main CPI attracted the most attention. The core consumer price index increased from 6.3% in August to 6.6% in September.
Interest rate hikes are lagging behind to have any real impact on inflation, and the underlying inflation rate is the preferred data that the Federal Reserve uses to shape its monetary policy. At the same time, the surge in core inflation after the Fed aggressively raised interest rates from almost zero to 300–325 basis points during the last five FOMC meetings this year, including three consecutive rate hikes of 75 basis points each: in June, July and September, clearly shows that the recent rate hike has a nominal the impact on reducing inflation.
However, they had a strong impact on the growth of US debt yields. The yield on the 10-year Treasury passed 4% on Friday, and with Friday's gain of 1.68%, it is currently 4.02%. The 30-year US bond yield is not far behind the 3.997% yield.
The simple truth is that inflation is showing no signs of easing, and this is worrisome as expectations rise in financial markets that the Fed will raise its domestic federal funds rate to 5% or higher by March next year.
According to the CME FedWatch tool, there is a 96.7% chance that the Fed will make another 75 bps rate hike in November and a 66.7% chance they will raise another 75 bps in December, leading to a federal funds rates by the end of 2022 to 450–475 basis points.
The aftermath of the recent series of rate hikes has caused extreme volatility in the markets and rising bonds. The speed with which the Fed is trying to catch up is the main mistake of not raising rates in 2021.
Inflation in 2021 started at 1.4% in January and was 7% by December, and the Federal Reserve did nothing to curb inflation until March 2022.
It is clear that if the regulator implemented a small rate hike in 2021, inflation would be far from its current level.
The Federal Reserve has painted itself into a corner, forcing them to reconsider the extremely aggressive rate hikes we are currently experiencing.
According to the vast majority of economists, a federal funds rate of 5% or higher will have a devastating effect on the economy. This would have a negative impact on stocks and earnings and lead to more bond sell-offs. In effect, this can make it impossible to make loans from individual loans, such as mortgages or loans to corporations.
Even more worrying is that some economists expect federal funds rates to rise to 6% at some point. The consequences could easily exacerbate and accelerate a global recession scenario, causing a severe disruption to the global economy.
The sad truth is that this scenario could have been avoided had the Federal Reserve acted in response to rising inflation in 2021. They are certainly not responsible for the pandemic that led to the recession, but they are fully responsible for not acting in a timely and sensible way when it was clear in 2021 that inflation was starting to spiral out of control.