fed

The 2nd Fed meeting of the year is coming up. People are wondering if the Fed will raise rates by 0.25% or more aggressive and raise rates by 0.50%. The Fed I’m sure would love to do only 0.25%, but they are way behind.

How far behind? This graph is the difference between the Fed Funds rate and the CPI. Yes, CPI is backward looking, but … it’s not a good look.

You can see the difference has never been more negative. In other words, the Fed has NEVER been farther behind. Not in 1973. Not in 1979. Not ever.

The markets and economy better hope inflation subsides quickly. Otherwise the Fed is going to be forced to act very, very quickly.

As expected, the Fed discussed a much more aggressive tightening schedule over the next few months than was thought a few months ago. The stock market rallied on the news, but interesting the bond market move was bearish.

Here’s a chart look at Fed Funds Futures pre-announcement and post-announcement.

You can see the market now has a slightly faster expectations for Fed tightening – probably not too much difference, but it’s interesting to see the market rally when the news was either expected or slightly worse.

The bottom line is if we get 3 Fed hikes next year, the asset pricing market ultimately will not be happy.