January 5, 2022

We talked yesterday about the regime shift for markets for the new year.  This is the first year in a very long time that the Fed will have the task of inflation fighting.  And they are behind.    

On that note, as we also discussed yesterday, the markets are beginning to price in a more aggressive Fed.  Higher rates are bad news for high growth, high valuation stocks.  We saw a continuation of that today.  

The media will point to the Fed minutes today as some sort of trigger for a sell off in stocks. But the minutes only confirmed what Jay Powell told us a few weeks ago.   

Powell set the table for rate hikes, as early as March, in his December (post FOMC) press conference.  And he also said in that press conference, that the committee had discussed shrinking the Fed’s balance sheet, and in a manner that would be more aggressive than last time, due to the nature of the strength of the current economy and the inflation threat. 

So, with this guidance, we should expect the interest rate market to move higher.  It is.  The 10-year traded to 1.70% today … and 2% is coming.  As you can see in the chart, that would be pre-covid levels. 

With this chart above in mind, the Fed has been in control of the interest rate market since March of 2020.  By March of this year, they will be out of it.  That means we could see a reality check in the coming months — for market interest rates to finally (and maybe quickly) begin reflecting an economy dealing with 7% inflation.