Inflation Hysteria: Ignoring The Bigger Picture Has Economic Consequences

Inflation Hysteria: Ignoring The Bigger Picture Has Economic Consequences

Eliminating CPI Base Effects

Since the turn of the year, markets have been fixated on possible Fed actions, seemingly ignoring signs of an imminent economic growth slowdown as they “priced-in” an aggressive Fed tightening protocol. While the yield curve, as a whole, has ratcheted upward, short-term rates spiked faster than long-term. The 2-Yr Treasury Note is now within 35 basis points (bps) (0.35 percentage points) of the 5-year and within 46 bps of the 10-year. At 12/31, these were spread 53 bps and 78 bps respectively. Remember, historically, when the yield curve has inverted (short-term rates higher than long-term), a recession has occurred 100% of the time. Because long-term rates aren’t rising as fast as short-term, the markets are telling us that they believe that Fed actions are going to slow the economy. Trouble is, the economy is already slowing!