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The Fed and the Market: Something is not right



Today's testimony of Fed chairman Jerome Powell said:

"The relationship between the economic crisis or unemployment and inflation … has disappeared."

Uh, wait a minute. Have you seen the pressures for inflation and jobless claims today? Unemployment claims were very high, as was inflation.

Actually, when I saw these numbers, I was shocked. They lower interest rates and inflation has just reached a 1.5-year high. Something is wrong.

View the data

Weekly jobless claims.

 Unemployment claims

Source

Lower means stronger; ie fewer jobless claims = less of less = more jobs.

Let's see, inflation.

 Core VPI-MOM Chart

Source

While jobs are strengthening month-on-month, core CPI has also reached its highest level in one and a half years and is at its highest level years.

So it's a bit ironic that the day Fed Chairmanship says that there is no correlation between jobs and inflation. We see strong jobs driving strong inflation.

And a rate cut?

This is a very strange situation. If I told you before the Congress Fed Presidency that employment and inflation numbers would disappear, what would the Fed Chairperson say?

I would not expect him to sound more restrained.

Something is going on.

And you see how bonds and returns react. You see that the comments from the Fed are affected. This increases the returns.

Higher inflation leading to higher yields is a market risk.

A cut in Fed policy rates in the face of increased inflation and employment is a risk that inflation could be higher. This carries risks for bond and equity prices.

What is the risk?

This is only a month. But a strange one. I've been in this business for a while. Higher inflation and strong jobs are not grounds for lowering interest rates. If anything, they are reasons for a rate hike.

If these numbers remain high, cut rates may exacerbate the increase in these data metrics. Then the Fed has to reverse its course and raise interest rates, which is a market risk.

Conclusion

We had a very ironic twist between the Fed and the statement that the inflation-unemployment ratio no longer matters. This is exactly the day the data is reported in lockstep. This is a day after the Fed has talked about lowering interest rates. Something is wrong.

I usually talk about technology. I call daily in the subscriber market. But this news caused me to write about it publicly today.

Very ironic today.

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