Anyone who has driven too fast in slick conditions has likely experienced overcorrecting. If you steer a vehicle too sharply in one direction you will start  to skid or slide. When this happens, you need to quickly steer in the opposite direction in order to correct it. However, overdoing it can create a worse skid in the opposite direction. The pattern then repeats with each skid growing increasingly violent until the vehicle spins out of control.

In 2020, the Fed flooded the economy with money (by just printing more) in hopes of easing a short recession due to the government shut-downs.  The trillions of dollars created by the Fed for the government to spend, resulted in too much money relative to the size of the economy…Enter inflation. 

In order to bring inflation under control, the Fed needed to reduce the amount of money in the economy. A prudent Fed would cut back on the newly created money that was given to the government, because that is what started us off on this inflation ride.  This could have been accomplished by selling off trillions of dollars in Treasury bonds. Yet, this option did not appear to be favorable to the government as the Treasury would have to auction its new bonds to the private market requiring much higher bond yields. Higher bond yields would raise borrowing costs for the Treasury and make government spending levels prohibitively expensive. Therefore, instead of curbing government spending, the central bank instead “passed the costs onto the customers.” The Fed has raised rates eight times in the past year, which has increased borrowing costs for consumers and businesses. Typically this causes the private sector economy to slow down and throw the economy into the wall of recession.

Enter the anomalies of this rollercoaster ride…

First of all, the labor market remains strong. According to the Non-Farm Payroll Report, the economy added 263,000 jobs in November 2022, and in January 2023, The Bureau of Labor reported a low unemployment rate at 3.4%. The plethora of “We’re Hiring” signs suggests that jobs are available for those who want them. So there are no typical indications of any job losses or cuts that result from a slowing  economy. 

The second anomaly is that the markets are rallying despite the interest rate hikes. Historically,  lower interest rates tend to lead to rising stock prices, and higher interest rates to falling stock prices. After the Fed raised rates again on Wednesday, February 1, 2023, the S&P 500 index rose 1% on Wednesday while the Nasdaq jumped 2%. Could this be a premonition that Wall Street is confident that inflation pressures are easing and the Fed will end up lowering rates this year? I guess we will have to wait till the end of the ride to see. 

Tickers to consider:  CEI &  MARK

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