Can Federal Reserve Control Inflation With Higher Interest Rates?

commodities index trading price buy signal bullish trend chart year 2022

So, the whole U.S. watched the Federal Reserve raise rates by .75 bps Wednesday.

And, with all the news coverage and analysis, yours truly has tried to warn you all that whether the Fed raised by 50 or 75 bps, it does not matter.

Equities underperformed commodities from 1999 to 2009

This was followed by an 11.8-year streak of outperformance by stocks due to QE and low rates.

Now, for the last 2.2 years, commodities are outperforming.

Will this last for ten years?

The S&P 500 is now in a bear market for the first time since the pandemic-induced drop in 2020. The Fed raised for a third straight time. 

Regardless, two increases in the previous two Fed sessions had little influence on rising energy and food costs, and today’s hike will almost certainly have little effect other than potentially in the housing market. 

What do we have?

The knee jerk reaction of the stock market was to rally. And so did gold, silver, copper and pretty much everything except for oil and energy.

Government officials, except for maybe Janet Yellen, may not want to admit it, but global macro data all points to global Stagflation.

Several days ago, the World Bank slashed global growth forecasts and warned of 1970s-style stagflation.

If oil supply and demand fall for now, that complacency it will foster among investors that inflation has peaked, and the Fed is doing its job could be dangerous.

We expect food commodities (and energy) to continue to lead inflation higher.

We believe that Wednesday’s rally in equities might be met with further selling very soon once the market realizes that the Fed cannot go far enough. They raise more, the threat of recession (although it is really stagflation) ensues. They do not raise enough, and inflation goes on for perhaps the next 3-8 years.

Regardless, watch our dear Granny Retail XRT. The immediate indicator on where consumers go from here.

Twitter: @marketminute

The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.

Sign up for our FREE newsletter
and receive our best trading ideas and research