…and the only prescription is more cowbell.
This is a quote from a classic SNL skit featuring Will Ferrell and Christopher Walken.
Walken isn’t the only thing heating up, so is inflation, or at least that has been the story of 2022 … so far.
In the SNL skit Walken is in the music studio with Blue Oyster Cult trying to get a perfect recording of “The Reaper” and repeatedly requests “more cowbell”.
Likewise, the Federal Reserve, as part of its dual mandate (more on this later) is trying to fine tune the economy with rate hikes.
The Fed Funds Rate, an overnight lending rate, currently sits at 1.50% – 1.75%.
The year-over-year change in inflation has consistently reported over 8% the last few months.
This means the Fed’s benchmark rate is over 6% negative in “real” terms (adjusted for inflation).
This has tremendous impact on market psychology as the erosion in the consumer’s purchasing power leads to a dramatic shift in consumer confidence (worst on record) and quickly alters how we spend.
We all begin to catch inflation fever, telling ourselves that it will never stop and prices will keep going higher.
Meanwhile, The Fed is in the studio telling you the only cure is more rate hikes.
However, before the economy could sing along with the maestros at the central bank, we started playing our own tune.
Consumers begin to reject the higher prices. We stop discretionary spending. We begin budgeting. We buy just one apple, instead of two.
The producers of goods start to build up a back-log (inventory) and in order to move items off the shelf they begin cutting prices.
In response, businesses and manufacturers slow down production and services, eventually reducing their work force; this creates a negative feedback loop that echoes through the economy.
This eventually leads to recession (two consecutive quarters of negative GDP) which seems to be an almost certainty for the first-half of 2022.
The final chart below shows the rate of change in the 2-year US Treasury Bond and its accuracy in predicting the strength of the economy (ISM Index – Institute for Supply Management).
So while The Fed is telling us “more cowbell” the reaper has already killed the economy because the real cure for higher prices, is actually HIGHER prices.
I shared a similar post on Instagram which you can view HERE.
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