Rising inflation expectations are pushing interest rates higher. But Fed moves matter more. If the data continue to show growth in the economy, markets will move toward the Fed and interest rates will rise.
The rise in inflation is necessary but not sufficient to force the Fed to tighten even more aggressively than it has forecast.
This month, we have seen an unprecedented increase in volatility. When the fundamentals take a knock, that’s when we should worry though. Let’s wait for the CPI next week and revisit this conversation.
With the Fed already on notice about inflation because of “low, low unemployment”, massive amounts of new deficit spending will only move up their timetable. And bond rates will rise as a result.
The short vol trade may now be over. Bond yields will again reach levels that causes angst for equity markets. And equities will tumble. Rinse and repeat.
Reuters has done a state-by-state analysis of wage data in the US, showing average pay rising over 3% in more than half of US states. This puts more pressure on the Federal Reserve to raise interest rates.
When defaults begin to rise and the economy begins to slow, we will find out whether deficits really drive rates higher or cause inflation to rise and remain high.
We’re looking at about 1% in real terms. In the 2000s, we saw real earnings growth rise to 2% and in the late 1990s, it was even 3%.