What Comes After the Great Liquidation, by MN Gordon

Do rising interest rates break inflation or the economy and financial markets first? From MN Gordon at economicprism.com:

Expectations were great.  When 2023 started, there was a general sense that the stock and bond markets had turned over a new leaf.  A repeat of 2022 was out of the question.

The primary assumption was that inflation would relent.  After that, everything else would neatly fall in line.  Specifically, interest rates would decline, and the next great stock market boom would bubble up just in time to bailout the meager retirement savings of aging baby boomers.

That was the general outlook when 2023 commenced.  But instead, the opposite is now happening.  Inflation is persisting.  Interest rates are rising.  And stock and real estate prices are headed down, down, down.

This week, for example, Fed Chair Jerome Powell, in his semi-annual Congressional testimony, clarified that interest rates would go “higher than previously anticipated.”  He also noted that, if needed, he’s “prepared to increase the pace of rate hikes.”

In other words, the much-anticipated Powell pivot has gone on indefinite hiatus.  You can fight the Fed and buy stocks if you must.  But you won’t likely be very happy with the results.

Moreover, Fed rate hikes are only part of the story.  To be clear, the Fed’s rate hikes are to the federal funds rate.  However, they do, in fact, influence Treasury rates.

Since March 2022, the Fed has hiked the federal funds rate from a target range of 0 to 0.25 percent to a range of 4.50 to 4.75 percent.  As a result, and over this duration, the 2-year Treasury yield has jumped from 1.75 to over 5 percent.

What to make of it…

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