This Would Be Foolish

Don’t chase the market, guys.

financial markets are volatile and downward pressures on inflation are building. The employment picture gives officials an incentive to raise rates to prevent the US economy from overheating, but market instability and the inflation outlook provide reasons to hold off.

Market instability isn’t relevant to this. Further, rising interest rates are inherently inflationary—and the Fed has said for a long time that it wants a 2% inflation rate, which is substantially higher than what the current inflation rate has been for the last several years.

In addition to falling stock prices, yields on corporate bonds are rising relative to safe-haven Treasury bonds.

Well, yeah—this is rising interest rates in the private sector. Which are the ultimate interest rate targets of the Fed’s benchmark rates.

The Fed needs to stop chasing current events and set its benchmark interest rates at levels historically consistent with 2% inflation.

And then it needs to sit down and be quiet and let the markets sort through the inevitable interest rate/inflation transition volatility, while the underlying economy sorts through the same transition, but with much less volatility.

Leave a Reply

Your email address will not be published. Required fields are marked *