Monetary Tug-of-War

I also shared a similar post on this topic via Instagram.



The Fed’s preferred inflation metric (PCE) reported the highest year-over-year increase in 40 years today.


The Personal Consumption Expenditures data is the change in goods and services consumed by all households.

However, the consumer doesn’t need Fed data to tell us everything is more expensive.

Yet, the saying goes “the best cure for higher prices, is higher prices”.

Meaning, consumers eventually reject higher prices and stop spending, which you can see in the chart below as the rate of change in both incomes and spending has collapsed.


The bond market has responded dramatically to inflation concerns, frontrunning Fed rate hikes.

Most mortgage rates are tied to mortgage bonds, and as a result mortgage rates have risen at the fastest pace since the 90’s.

Higher rates, low housing inventory, and falling incomes puts the mortgage payment-to-income ratio back to extreme levels of the early 2000’s housing bubble.


These conditions have also led to a decline in the savings rate; an almost decade low.


Recession is two consecutive quarters of negative growth, and Q1 GDP was negative.


With surging costs slowing the economy, should the Fed actually be raising rates?

Despite their dual mandate of maximum employment and price stability, raising rates feels like a blunt tool to use in such a delicate situation of “Monetary Tug-of-War”.

The Fed is projected to raise rates aggressively, expectations are 0.50 – 0.75% multiples times in 2022.

This has also led to volatility in foreign exchange markets (FX) as global markets struggle to deal with dollar liquidity shortages, pushing the dollar to 20-year highs against its peers.

As the reserve currency, the demand for dollars is threatening the stability of emerging markets and systemically important economies like Japan.


Raising rates will exacerbate the problem and potentially trigger a crash in global markets.

There is always a winner in tug-of-war, but this time it looks like everyone is destined to lose.

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