Markets Policy Partners: The Fed Is Fighting a Bigger Foe Than Inflation and Risk Investors Should Beware

This year, the stock market has moved around the narrative that the Federal Reserve has had to raise interest rates to fight off inflation. With inflation rising to 40-year highs in 2021, that narrative has made sense.

Now, with inflation on the decline, investors are starting to look ahead to the Fed ending its interest rate hike policy. But that might not be the best way of looking at what the Fed is doing now.

That’s because the central bank has made its steepest rate hike cycle in over 40 years. That’s a bit unusual following the prior tightening cycle, which took years to play out, and occurred over a series of quarter-point rate hikes.

While we may be nearing the end of the current rate hike cycle, the real issue ahead could be policy lag. It can take a long time for a change in monetary policy to ripple throughout the entire economy.

Meanwhile, the Fed is still raising rates while the yield curve has inverted. That’s usually a sign of a recession ahead and that monetary policy may want to get more accommodating.

2023 may show that the Fed isn’t just crushing inflation, but that the Fed is now moving to detach the financial economy and the real economy. If so, there may be further pain ahead for stocks in the months ahead.

To listen to the full interview, click here.