Inflation Persisting

Even though inflation seems to have peaked months ago, it is still high. Until the Consumer Price Index was reported this week, many investors hoped for more of a decline. The disappointment collapsed hope that the Federal Reserve could engineer declining inflation without crushing the economy. The reaction in both the stock and bond markets was immediate and dramatic.

The Bull and his partners are not so sure that conclusion is warranted. The Fed is likely to talk tougher than its actions turn out to be. It, after all, also has significant constraints. They are political as well as practical. Remember, it has a dual mandate, both full employment and stable prices. Nothing that they can do will alleviate the supply constraints brought about by war, drought, logistical challenges, and more. Killing the economy with ever higher rates serves little purpose.

Jumping to a most negative conclusion about the future course of our economy seems an over-reaction. Yes, we are going to get higher interest rates; we already knew that. Whether they are much higher than before is unlikely. At the very least, the Fed will have to pause soon to evaluate the impact of the policy steps it has already taken. Monetary policy works with a significant lag, 6 to 18 months later is when one can really see full results. In the meantime, the economy is working through its many challenges. Stay steady my friends.

The Lonely Bull