A Change in the Weather

Fed Chair Jerome Powell's press conference signalled a change in the weather for market particpants. The Fed will no longer act as a benign supporter of asset prices as their inflationary policies are now being felt in consumer prices and wage rates. Simply put, the Fed has now recognized that asset price inflation has transmorgrified into consumer prices, a phenomenon we noted a year ago. ( Shulmaven: "Is the Pandemic Hiding Future Inflation," UCLA Economic Letter, January 2021)

By allowing for the possibilties of more than four rate hikes next year and even the potential for a 50bps move, Powell all but admitted that the Fed is behind the curve. Almost intantaniously the two-year note started pricing in five 25bps rate hikes this year. Instead of pre-empting inflation as the Fed has done in prior cycles the Fed now has to contend with a very hot 7% inflation rate in consumer prices combined with a fully employed economy. Because monetary policy acts with long and variable lags, it is in no ways certain that the inflation rate will even approach its 2% inflation target by yearend. As I have stated previously I believe that conumer price inflation will be running at 4-5% rate on a year-over-year basis in December. (Shulmaven: Way Too Complacent about Inflation and Rates)

As a result the Fed has a lot of work ahead of it and it is likely that the tightening cycle will last well into next year. Thus in my humble (a Powell word) opinion that roaring bull market we have been used has come to an end and its place will be a broadly sideways market with severe rolling adjustments that will be masked by the broad indices. In this environment value properly defined will outperform growth.