Quoth the Raven: Everyone Is Just Pretending Nothing’s Wrong
Markets have moved sideways in the weeks following the second and third-largest bank collapses in U.S. history. It’s clear that interest rates have risen so quickly over the past year that some companies made a mistake by expecting a slower move.
We’ve now seen signs that something has broken in the markets. Yet things are calm. That’s not a sustainable trend. It’s also a sign that things will get worse until they get better.
The current strategy of simply creating more money to paper over the banking system won’t cut it forever. And cutting interest rates to save the economy from a recession may end up creating an even more unsustainable future bubble.
For now, these moves have created the illusion of stability. But economic reality can’t be ignored forever. Nor can it even be delayed for too long.
In the meantime, investors now expect the Federal Reserve to stop raising interest rates as it nears 5 percent. Yet inflation is still at 6 percent. That means we won’t solve the inflation problem if the Fed has to stop now to save the banking system.
Historically, the Fed has acted to save the banking system – it’s the central bank’s primary job, after all. But that may mean investors can expect a contracting economy that still has high inflation. That’s a recipe for stagflation.