Breadth Thrusts & Bread Crusts: Fed Up With Inflation

JC Parets
February 10, 2022

From the desk of Willie Delwiche.

There is plenty of chatter today about inflation, the bond market, and the Fed. 

I have a couple charts to share – and a couple key points worth making. 

Inflation continues to run much hotter than a year ago and the Fed is still playing catch-up. The yearly change in the median CPI was at its highest level in a decade going into COVID, and is now at its highest level in 30+ years. Pressure is not letting up, and the 3-month change in the median CPI has surged to its highest level on record.

One reason this surge in inflation has caught so many off guard is the speed at which it has occurred. CPI inflation was 7.5% in January, the highest level since the early 1980’s. One year ago (January 2021), it was 1.4%. You need to go back to the 1950’s for a time when inflation surged more over the course of a single year. Inflation was higher in the 1970’s and early 1980’s than it is now. But the pace of the increase was less dramatic.

The Fed has talked a tougher game on inflation in recent weeks and the market has been discounting more aggressive action on raising rates and unwinding the still-expanding balance sheet. But there’s still some catching up to reality that needs to take place. 

For example, two weeks ago, St. Louis Fed President Bullard (who is an FOMC voter this year) downplayed a 50bps rate hike at the March meeting. This afternoon, he said he would be in favor of such a move and the Fed should maybe even consider an intra-meeting rate hike. The bond market reacted with higher yields; the stock market responded with lower prices.

With the Fed re-calibrating its stance toward inflation, market participants are re-calibrating their view toward the Fed. It’s all happening on the fly – and aside from the liquidity considerations of a tighter Fed, the uncertainty of it could continue to fuel volatility in the weeks and months ahead.

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