Friday's Market Minute: The Fed is Behind the Curve

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The Fed is behind the curve on inflation and appears to express a sense of urgency in playing catch-up. According to the BLS Producer Price Report for December, the economy printed the strongest price increases since the series began in 2010. On an unadjusted basis, final demand prices moved up 9.7% in 2021. Lift-off of the Fed’s main policy rate is now broadly expected in March, and yet the Fed is still adding to its balance sheet despite official inflation measures clearly above target mandates. The economy has also begun 2022 with much tighter labor markets than a year ago, adding cost push pressure to the mix, so the Fed may struggle to tighten without some market turbulence.

So far this year, the stock market is balancing two things. On the one hand, there is less support expected from monetary policy. But on the other hand, the underlying economy is strong with major corporate earnings figures rolling out in the coming weeks ahead. All else equal, policy tightening is likely to be gradual and at a pace that risk assets should be able to eventually handle. It’s important to remember that rates are rising in an environment of strong cyclical recovery, yet Wall Street is trying to get a sense of how much growth is going to slow as the real cost of capital adjusts upward.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.