Back-to-Back Market Smackdowns Coming from the Fed and ECB. Could Be a Hoot

Surly frustrated central bankers telling euphoric markets that the inflation fight is far from over.

By Wolf Richter for WOLF STREET.

The Federal Reserve, the European Central Bank, and the Bank of England have rate-hike meetings over the coming days. And markets have set out to fight all of them. Of the two big ones, the Fed will speak on Wednesday, February 1; the ECB on Thursday, February 2. And this may turn out to be a hoot.

The ECB, which is far behind the Fed in its rate hikes and has an even bigger inflation problem on its hands, has laid out a course of rate hikes that is far steeper than markets have priced in, to the point where ECB president Christine Lagarde warned markets 10 days ago to “revise their positions,” and markets have blissfully brushed it off.

In terms of the Fed, ever since the initial lift-off rate hike less than a year ago, there have been Fed-pivot bets for a few meetings out. And they all got smacked down. But this time, the rate-cut bets are huge, practically begging for an epic smack down.

The Fed will not release at this meeting any updated projections, including the infamous “dot plot” that indicates where Fed governors see the future path of its policy rates. It releases those projections only at the four meetings that fall near the end of the quarter. The last one was released at the December meeting. The next one will be released at the March meeting.

At every single meeting since the fall of 2021, the Fed was more hawkish than at the prior meeting by projecting higher rates for longer. It has tightened the screws at every meeting. At the December meeting, the Fed projected for the first time that it would hike its policy rates above 5% and that there would be no rate cuts in 2023. Since then, every single Fed governor to speak on the topic emphasized: No rate cuts in 2023. No way Jose, the markets are saying.

It is widely expected that the Fed will hike by 25 basis points on Wednesday, bringing the upper end of the target range to 4.75%, far higher than projected a year ago. The dot plot released after the December meeting showed that a majority of the participants projected 75 basis points of hikes in 2023. This would be a 25-basis-point hike on Wednesday, one in March, and one in May. And then a pause for the rest of the year to see where inflation is going.

There seems to be no consensus at the Fed about the upcoming rate hike. Some governors came out in support of a 25-basis-point hike, others said that for them a 50-basis point hike is also on the table. The meeting could end with some dissenting votes, whichever way it goes.

The projections of 75 basis points in hikes this year and then a pause into 2024 will depend on inflation data showing “compelling” evidence, as the Fed keeps saying, that the core PCE price index, which is the reference index for the Fed, is heading back to 2%.

But on a month-to-month basis, the core PCE price index re-accelerated in December, though year-over-year it slowed to 4.4%. The PCE price index for services re-accelerated as well month to month, and year-over-year hit a new four-decade high. So, this was a step in the wrong direction.

Inflation has come down from the peak due to the plunge in fuel and a drop in durable goods prices. But it’s still very high, gasoline prices are already surging again, durable goods prices won’t drop forever, and inflation in services is red hot.

Inflation has a habit of dishing up nasty surprises. The Fed knows it, has repeatedly pointed at the upside risks to inflation, and has repeatedly emphasized the need to see “compelling” evidence that inflation has been squashed before rate cuts begin.

One of the nasty surprises that inflation dished out a couple of days ago was in Australia, where the annual inflation rate accelerated to 7.8% in the fourth quarter, up from 7.3% in the third quarter, which caused some revulsions in the money markets, as they priced in another rate hike.

In the US, the markets have brushed off any warnings about inflation and any reminders by the Fed that there would be no rate cut in 2023. And on Wednesday, the Fed will make clear once again that the inflation fight is far from over. This may turn into another classic smackdown of the rate-cut rhetoric and rate-cut bets.

During the era of money printing and interest rate repression, the sacred mantra on Wall Street was, “Don’t fight the Fed.” Now they’re all fighting the Fed with gusto, which makes for a fragile situation because the Fed is going to win, that’ll be easy.

The hard part for the Fed is winning the fight against inflation, and it may be messy, and it may take longer than expected. Last time we had this kind of inflation, it was brought under control only after many years of head fakes and nasty surprises.

The European Central Bank faces a similar situation: markets are blowing it off. Everyone expects it to hike 50 basis points at the meeting on Thursday, to bring its deposit rate to 2.5%. It has a long way to go to get into restrictive territory, with inflation in the Eurozone over 9%.

ECB officials have suggested three 50-basis-point rate hikes in a row, which would push the deposit rate to 3.5%, followed by smaller rate hikes, based on a best-case scenario of declining inflation.

But markets expect rates to peak at 3.25% by the summer, at which point the ECB would pause, according to Refinitiv data.

This is so far off the path the ECB sees that Lagarde rebuked the markets on January 19. Investors are underestimating the ECB’s commitment, she said. Investors should “revise their position. They would be well-advised to do so,” she said.

The ECB is determined to bring inflation “back to 2% [from 9.2% now] in a timely manner, and we are taking all the measures that we have to take in order to do that,” she said. Markets just brushed it off.

On Thursday at the post-meeting press conference, Lagarde will have an opportunity to throw in some frosty comments to do another market smackdown.

So we’ll have a week coming up where surly frustrated central bankers will tell euphoric markets that inflation is a serious issue, that the inflation fight is far from over, and that they’re not backing off in this fight until inflation is squashed. And this could turn out to be a hoot.

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  258 comments for “Back-to-Back Market Smackdowns Coming from the Fed and ECB. Could Be a Hoot

  1. info says:

    They should ramp up QT too. Even just by a few billion. Every month.

    • Inno says:

      ^This! How is it everyone is thinking about rates (flows), rather than the QT and balance (“stock”…but not the equity form). Get rates to 5% then start to dump balance sheet…

      The the Fed ends up underneath the market…where they want/need to end up. Somehow refloating a lead balloon.

      • Leo says:

        Yes, “Actions speak louder than words”. So, the Fed reducing / pausing rate hike while sounding hawkish isn’t doing any good.

        A 40 year old business, one of my favorites is closing the end of the month, adding to the list of my liked businesses that closed in last 2 years.

        Reasons: The building owner refused to decrease rent after crazy pandemic increase! Also employee costs soared making the business non-profitable.

        Apparently, the current building owner is a big pivot fan and refuses to see that here office building occupancy remains below 25% due to WFH, and most malls here now have 50% vacant space.

        Hence I would respectfully disagree with Wolf, that Fed has done enough QT, or is doing enough QT to save the real economy.

        • rojogrande says:

          I had deja vu reading this comment.

        • drg1234 says:

          Leo, I will respectfully disagree with you. Your example tells me that price/rent setters haven’t felt enough pain to acknowledge reality. Their gravy train of easy money is over.

          This is why crashes occur. People won’t see the train that’s coming straight at them.

        • Shiloh1 says:

          I’d like to know the landlord’s local property tax situation past 3 years.

          All roads lead to the criminal political class.

          My copy of the Constitution doesn’t contain ‘emergency’ or ‘lockdowns’.

        • FogCutter says:

          If your statistics are valid, then it sounds like that business owner should be able to move almost anywhere nearby for half price rent? Something doesn’t add up, or somehow every landlord in your area are lost in the clouds together

        • Leo says:

          This specific business requires a specific building type, that increases cost of moving. Also “somehow every landlord in your area are lost in the clouds together”- that’s the state of Seattle area.

      • crazytown says:

        Rates are important for repricing all debt eventually (private and government) which is going to end up flushing the toilet, so to speak. I actually agree with being careful because we won’t see the actual effects for a long time. QT should only speed up for MBS that the Fed shouldn’t even have, but for treasury securities why rush it when a lot of the work is already done through the reverse repos. All that cash getting mopped up by money market funds who participate in the reverse repos is essentially QT.

        • info says:

          Government spending is at record levels. And you somehow still think QT is fast enough to cool inflation to 2%

    • gametv says:

      Wolf – A topic I would be very interested in is more detail on the impact of healthcare inflation on inflation measurements and more specifically, how the adjustments in the measurement of healthcare have impacted inflation measures. It seems like earlier in 2022 healthcare inflation was overstated and then with the adjustments down in the past couple months, it gets understated.

      I am curious whether we will start to see healthcare inflation once again run up as the adjustments unwind, or whatever happens with that.

      I thought that healthcare made up nearly 25% of GDP. Does some of this fall into other categories for inflation reports? Healthcare seems like one of those areas where inflation could be very sticky, due to the lack of effective price competition/transparency.

      • Wolf Richter says:

        Only the CPI inflation measures (by the BLS) use the healthcare inflation method that comes with this annoying and confusing adjustment.

        The PCE price indices (by the BEA) use a different measure of healthcare inflation and are not subject to this adjustment. So in terms of the direction of inflation – not the magnitude – PCE might give you a better indication.

        Healthcare is about 18% of GDP. A portion of it is paid for by businesses and governments, and these portions don’t figure into the “Consumer” price inflation.

  2. Mr. Market says:

    When I look at the bond markets of TODAY then I see the following things:
    1) the FED is going to raise rates to 4.50%.
    2) the FED is going to lower rates somewhere this year. When ? That’s something Mr. Market will determine. Of course, if the bond markets tell a different story in say 7, 14, 21, 28 etc. days time then I’ll have to change my mind. But right now Mr. Market is very clear and has been telling – for those who knows where to look, including me – since sya november last year that there rate cuts are coming. Starting in say early november 2022 Mr. Market started to change its mind.

    • Mr. Market says:

      – I see similar developments going on in 2 other countries called Canada & Australia.

      • Lucca says:

        No way Jose!

      • Inno says:

        GDP of Canada = 1.988 USD (2021)
        GDP of Australia = 1.533 USD (2021)
        GDP of US = 23.32 USD (2021)

        everyone has a voice though…especially among the FVEY

      • Wolf Richter says:

        Mr. Market,

        “I see similar developments going on in 2 other countries called Canada & Australia.”


        “One of the nasty surprises that inflation dished out a couple of days ago was in Australia, where the annual inflation rate accelerated to 7.8% in the fourth quarter, up from 7.3% in the third quarter, which caused some revulsions in the money markets, as they priced in another rate hike.”

        Quoted from my article here.

        • Mr. Market says:

          – But you’re (wrongly) assuming that inflation drives interest rates. A counter example is what happened in the time frame june 2007 – july 2008. In that time frame the FED kept lowering rates while at the same time oil continued to climb higher from (about) $ 60 to over $ 140.
          – Different countries ==> different financial circumstances, different inflation rates and different interest rates.
          – But people in all 3 countries are the same and will react the same to the same (improving or deteriorating) financial circumstances (i.e. sell or buy government bonds).

        • Wolf Richter says:

          Mr. Market,

          Forget 2007-2008. 1970s to 1982 is the model period because that’s where we are with inflation.

        • Julian says:

          Highest Inflation in Australia since the 90s – it’s brutal!

      • The Real Tony says:

        They had to pause in Canada because of all the homes bought with falsified income to obtain mortgages. If home prices keep falling it will send out the wrong message to people emigrating to Canada from India and Pakistan.

        • Shiloh1 says:

          Like leading up to 2008 here, how do the poor immigrants always fool the Ivy League MBA?

          Yeah, there’s fraud, no doubt. Maybe Bug Short 2 will have the Steve Carrell character researching Vancouver strippers this time.

    • Wolf Richter says:

      Mr. Market,

      You’ll be part of the smacked-down, LOL

      “1) the FED is going to raise rates to 4.50%.”

      FYI: The top end of the FFR target is already at 4.50%, as of the December meeting.

      They’re going to raise the top end of the range to 4.75% (at least) on Wednesday. And then to 5% at the meeting in March. And then to 5.25% at the meeting in May.

      For the entire past 12 months, people have said the Fed will hike one more time, and then pause, and then cut rates. That started when the Fed hiked to 0.5% last March. And now we’re at 4.5% and the tango goes on. This stuff is really funny after a while.

      • Mr. Market says:

        – Ah, but I am NOT betting on a rate cut in the next FOMC meeting (february 1 ??). At least, NOT right now. If there is a rate cut then it will be in march or later. Mr. Market will tell me WHEN. Just look at the bond markets !!!
        – If I was forced to make bet on what is going to happen in the NEAR future and put some money behind that bet then I would put the most money on a rate hike (to 4.50%) and less money on rates staying flat.
        – I would put even less money on a rate hike to 4.75% or higher.
        – But I wouldn’t put one single penny on a rate cut (yet).

        – Please write this opinion down on a piece of paper. then we’ll know who was right or wrong after the next meeting of the FED. If I am wrong then I’ll write a new post on this blog admitting I was wrong. Deal ?

        • Wisdom Seeker says:

          Re “Mr. Market will tell me WHEN. Just look at the bond markets !!!”

          No, it will not. The bond markets have been consistently wrong about the future of interest rates. Never in the past several years did the market anticipate the interest rate uptrend for 2022.

          Mr. Market “told” you a year ago that rates wouldn’t be where they are today. It “told” you 6 months ago that the Fed would already be lowering rates today.

          Whatever it is “telling” you now is no more accurate.

          Mr. Market doesn’t want to “get it” about sustained rate hikes b/c Mr. Market is, in aggregate worldwide, long about $200,000,000,000,000 ($200T) in stocks and bonds that someone has to own at all times. Those assets have been going down, and will again go down in price b/c of Fed hikes. Someone’s got to be the bag holder for all of that, but no one wants to be, so Mr. Market’s mouthpieces are desperately trying to fool whoever they can into buying said assets at a premium before the next price plunge.

          In short, this is a huge worldwide game of hot potato, and they’re trying to convince you to hold the potato and get burned.

        • JeffD says:

          Many economists are saying the services part of inflation appears to be “sticky” at 4%. Assuming they are right, then the bond market is obviously wrong, no?

        • ru82 says:

          The Fed cannot lower rates if the Government keeps spending. loose Monetary policy or loose fiscal policy are both inflationary.

        • gametv says:

          The key word you used there was “betting”. Just like any bet, this is all guesswork. Noone really knows how inflation will pan out over the coming year. I have a guess that services inflation will remain sticky and the Fed will hold interest rates higher for longer, but that eventually, the falling home prices and lack of additional government stimulus will kill off any rallies in the stock market and we will see equities at least 20-30% lower and a bigger purge of some bubbles.

          To me, the real question is whether the Fed will cut rates really aggressively, or allow the economy to plunge into a recession as the Fed tries to normalize monetary policy. I think that a recession accompanied by more normal monetary policy is the much better long term solution, rather than returning quickly to the days of easy monetary policy which will simply lead to more instability in financial markets in the long term.

          We need the Fed to continue to sell off that 8 trillion of assets – even if it means a severe recession. Because if they dont get rid of those assets it just creates a system that is more fragile and creates a lack of trust in our whole monetary base that WILL lead to the next bubble/bust cycle.

          Short term pain, but long term gain is what we need.

      • Mr. Market says:

        – OK, you want ranges ? Below my expectations for ranges to be set at the next FOMC meeting:

        – I expect the range to be changed from 4.25% – 4.50% to 4.50% – 4.75%
        – I consider it to be less likely that the range will stay at 4.25% – 4.50%.
        – I consider it to be even less likely the lower end of the range will be changed to 4.75% or higher.
        – I consider it to be unlikely the range to be lowered to 4.00% – 4.25% or to a lower range.
        – These opinions are consistent with my bets made above.
        – What happens in march and later will be made clear by the bond markets. “We’ll cross that bridge when we come to it”.

        • American Dream says:

          Your commentary is quite worthless considering your simply saying whatever the market says is going to happen is correct.

          Your last comment on I’ll adjust my views if the market changes shows that perfectly.

          So if the ten year goes back up above 4.2% then you’ll agree with it to?

          If Mr market was never wrong then why do we have any volatility at all in markets.

          The only thing that is projectable is data. Inflation is proven to be sticky in services (where it’s still raging). Employment is proven to be much tighter then projected. Earnings are proving to be as weak if not weaker then projected (this will either be confirmed or disproven quickly). The terminal rate has only been projected higher and higher.

          Regardless of what your position is, why don’t you show some foresight and give a projection vs just saying welp whatever the market says is correct.

          I’ll give you mine.

          Pause at 5.25 FFR. Then three paths

          1, Economy can’t handle it ===recession, inflation cools
          2, Inflation spikes again (could easily be caused by another energy crisis) rates resume rising
          3, economy struggles and inflation remains sticky==stagflation

          Goldilocks scenarios where inflation comes down without tighter financial conditions make no sense and are continuously debunked by the tight labor market, rising wages, union strikes, persistent inflation just to name a few

      • eg says:

        I think it’s cute that Mr Market thinks that markets are in charge of Fed rate policy.

        News flash — it’s 7 people gathered in a room who vote on what they think it should be. Period.

        • nick says:

          Fed is Mr. Market!

        • Seen it all before, Bob says:

          Yes, Mr Market is the Fed.

          I think when corporations and banks control the economy, this is called corporatism or fascism. It is not any better than communism or socialism when the government controls the market.

          When does Mr Market = Capitalism again?

      • Original Marco says:

        So Wolf, with this belief you must think the S&P is going sub 3000 … ?

        • Gattopardo says:

          I wouldn’t put such a tight correlation on SP500 and short term interest rate changes. At some point, the equity market will look through past the tightening/holding cycle and discount appropriately, rather than tanking to 3000 for a couple months only to rip back to 4500 a year later. Or…not.

        • Shiloh1 says:

          I alway associate the 666 mark with Paulson, Bernanke and Geithner.

        • cd says:

          The fed raised rates before and the market was looking forward 2 other times and market didn’t correct.

      • Jay says:

        And then there was Bullard back in December saying a 7% terminal FFR was a real possibility. I completely agree.

        The 10YT has started to detach from FFR increases. This means that the 30YFM will decline into the mid to high 5% range between now & May’s 75-basis point increases.

        Housing will stabilize by late this spring and then begin small increases in sales & prices, nothing like 2021 mind you though.

        This will put the Fed into a big pickle by later this summer as inflation will have bottomed out and then begin the creep up.

        A 5.25% FFR will not push core PCE inflation down or even near 2%. That will take a 7% FFR that pushes us into recession by March 2024.

        The Fed goal of a 2% core PCE inflation outside a recession is dead.

        • info says:

          Then a recession it is then.

        • SocalJohn says:

          Not a snowball’s chance in hades that housing is stabilizing this spring.

        • Greg P says:

          @SocalJohn I agree completely. The housing downturn has barely even begun. The last bubble, which peaked in June, 2006 (national median prices) took a full 6.5 years to fully deflate (December, 2012). This round, prices peaked last June. We are barely six months in. There are tons of people holding their collective breaths with a strange expectation that the glory days of free money will be returning… instead of it being a once-in-a-lifetime occurrence.

        • gametv says:

          Jay – Housing prices will only stabilize if interest rates are dropped again. The monthly payments have simply cut off many potential buyers. Sellers have not increased inventories because they are looking for the market to rebound, but if that rebound does not happen because rates stay high, then sellers will finally capitulate.

          Typically a drop in housing should last 2-3 years. During the last housing crisis, the Fed was able to cut rates to put in a bottom, but will they be able to do that again? That is the big question.

    • mike says:

      To be fair, the Fed was wrong before with inflation being transitory and then changed their tune. It could be wrong now about inflation persisting and could change their tune if month over month stays tame. I believe that inflation is more persistent than not.

  3. Iona says:

    I’m kinda happy there are so many fighting the fed. It only forces them to raise rates higher and I can get better rates on 3 month tbills going forward. Redfin was up something like 20% yesterday! Let’s see a half point raise and watch the unicorns melt like icarus wings.

    • Anthony A. says:

      Six month T bills are the cream of the crop right now, but three month are not bad!

      • Anthony says:

        Ordinary banks and building societies in the UK are paying around the 4% rate……

      • Harvey Mushman says:

        I have downloaded my 1099s from TreasuryDirect and Fidelity in preparation for Taxes. I gotta say, it sure is nice getting a little return on my savings compared to the last couple of years. It’s all in T-Bills at this point.

    • Pea Sea says:

      “Let’s see a half point raise”

      Keep dreaming. Every meeting people expect the Fed to “shock the markets” and every meeting they do exactly what the markets expected. You’ll get 25 basis points and you’ll like it

    • economicminor says:

      This tells me that there is still too much money chasing any RIO.

      Tells me that gambling is still extremely prevalent..

      And that there is a lot of imagination that debt that produces no income will be again supported by the Fed thru new QE.

      I guess I’m just the crazy one to think that this cycle of irresponsible insanity is coming to an end.

    • Mike says:

      The inflation #s don’t really warrant a 50bps raise. Employment could support it. However, I don’t think raises will change the market’s view. It just means a quicker resolution to them. Bashing loosening market conditions have also not worked. QT and long term IR signaling like a reverse YC control (signaling) would work.

  4. Great article. But please let’s again summarize my points as to why the markets are supposedly in “ignorant bliss”.

    Markets are forward-looking. They price according to what they think is going to happen in the future.

    The markets do not believe the ECB or the Fed for very good reasons: 1) The U.S. government is broke. They cannot afford to service the Treasury debt with higher interest rates. Everybody knows this. The market knows this, too. 2) The Treasury market’s liquidity is already very shaky. 3) 2024 is a presidential election year. Tanking markets are bad for reelection prospects. 4) There are already plenty of dissenting voices from Jay Powell’s brave talk. Vice Chair Lael Brainard regularly undercuts Powell’s message, as well as other dovish Fed governors.

    Now, back to who is wiser, Mr. Market or Big Government. Time will tell, but assuming the Fed will continue to raise rates aggressively is questionable. By the way, the ECB is in even worse shape, and cannot afford for the PIGS (Portugal, Italy, Greece, and Spain) to suffer financial crises.

    I agree that Wolf is probably right that inflation is going to continue to surprise on the upside at times, but it doesn’t matter, because the Fed cannot keep raising rates aggressively because of the reasons stated above.

    So, what will happen instead? Higher inflation will be “normalized”. This is already happening. Many liberal Keynesian economists are already questioning the sacredness of 2%. Why not 4%? Even 6%? Even some writers in the WSJ are raising this point. After all, the 2% target is an arbitrary one. So, why not use a higher target? Expect to hear a lot more talk about this.

    Politicians of all stripes will keep pushing Big Government, reckless fiscal spending, and interest rate suppression until something really big breaks. Then, and only then, will the reckoning come. And boy, it could be vicious.

    Thanks again for a great article. Keep them coming!

    • Wolf Richter says:

      “1) The U.S. government is broke. They cannot afford to service the Treasury debt with higher interest rates. Everybody knows this.”


      It includes among others this chart:

      • Yancey Ward says:

        Wolf, this chart is almost identical to the chart of the 10Y US Govt Bond Rate, just lagged by about 1.5-2.0 years. That uptick, at the end, is the effect of the bond rate increases from Winter of 2021-2022. If you are correct about Powell seeing it through, that uptick will rapidly take out those lower high peaks from 2019 and 2008, even with revenues inflating up with the price-level.

        Powell, if he wants to make this crystal clear to the market, will need to do another 75 bp raise on Wednesday.

      • Concerned Citizen says:

        Wolf, call me a cynic but I believe this chart is why empires on the decline crave inflation. By inflating the currency the ratio of debt to GDP and in this case, tax receipts to interest payments all look better. In the end, the empire will eventually fall.

        • Wolf Richter says:

          Yes, this inflation is making it a LOT easier for the government to pay for the interest expense because inflation also inflates tax receipts.

          I DO hope that interest rates go high enough and that interest expense therefore goes high enough to impose some discipline on Congress, but we’re far from it.

          Congress has been stuck in the free-money phase for two decades. And now we’ve got this inflation.

        • Einhal says:

          Wolf, agree 100%. Before the free-money phase started, I remember (although I’m only 40, so I was fairly young) discussions of trying to get the deficit under control and wondering how and when we’ll pay it back.

          Now, you don’t hear anybody say this. No one is under any delusion that we’ll ever pay anything back. The endless deficits, QE, interest rate suppression and so on of the last 20 years has changed people’s thinking into believing that what has happened can go on forever. That’s why this inflation has shocked so many people, ordinary and “elite” economists and policymakers. They really thought we had defied the laws of economics for good.

          It’s going to take more than anyone can imagine to make people realize that the last 20 years was an aberration that will not be repeated, because the factors that caused it are gone.

        • Mark says:

          “Congress has been stuck in the free-money phase for two decades.”

          I guess we’re talking semantics here , but I’d call that “counterfeiting”. If I print 100 dollar bills, that’s “free money” and it’s counterfeiting…… right?

      • David Hall says:

        Are higher median household incomes bringing in higher tax revenues?

        Will the tax rebellion try to layoff IRS agents?

        Will the government ever run out of money while they can print more?

      • Kenny Logouts says:

        Interesting that the end of the last high inflationary period (70s) saw a spike it debt servicing vs tax receipt costs.

        Is that likely a result of high inflation?

        More justification for governments to want to fight inflation hard as I assume it eats heavily into operating costs while not impact revenue as much… if anything revenue may fall…? (Causing the spike in the graph?)

        Great article as always, thank you!

      • Gattopardo says:

        I also saw this in your previous article and forgot to ask…is that really correct, that 50%+/- of tax receipts went to paying interest??? Wasn’t the federal debt as a % of GDP way way way smaller than now? Yes, interest rates were a lot higher, but even by 1992? (recognizing a bunch of 30yr were issued at double digit rates a decade earlier).

        How were we not freaking out back then? It’s not like taxes were super low, and could be hugely raised.

        • Wolf Richter says:

          We WERE freaking out back then. And things actually changed in Congress. But it took that kind of nightmare. And then it didn’t last very long.

        • ru82 says:

          I remember people freaking out when the federal debt crossed 1trillion in the 1980s

        • 91B20 1stCav (AUS) says:

          RU82 – Ev Dirksen’s ghost just can’t stop laughing…

          may we all find a better day.

      • HowNow says:

        Awesome chart. It’s great that you bring “perspective” to some of these comments.

    • FastEddie says:

      Your points are commonly cited as to why the Fed will have to pause or pivot in the near term. I don’t comment frequently but in my comments I’ve repeatedly stated that Chairman Powell has done exactly what he said he was going to do. Rates will be higher for longer than initially anticipated. I wouldn’t bet against him for now. What ever happened to “don’t fight the Fed”?

      As to your four points:

      1) Absent a political decision to not pay its debt, the inability to pay based on higher rates makes no sense. US debt is denominated in US dollars; the US government issues dollars. Interest rates and tax receipts have nothing to do with ability to pay. This argument is like a zombie: it cannot be killed. Interest will be paid.
      2) Any evidence on shaky liquidity issues in the US Treasury Market? Because I haven’t heard about any. And what does this even mean? I am not being sarcastic – what does shaky liquidity mean? There aren’t enough people to buy the Treasuries?
      3). Agreed. Falling prices in asset markets will hurt re-election prospects. But are you saying that the Fed will cut interest rates so Biden will be re-elected? Based on what?
      4) The debate seems only to be about the speed of rate increases. Wolf has addressed this.

      My answer to your question as to who is wiser – Mr Market or Big Government? The Fed knows better what the Fed is going to do thhan Mr Market

      • HowNow says:

        Revisit Graham’s “Security Analysis”. Mr. Market is frequently wrong and is manic/depressive to boot. Buffett likes going to the beach at low tide. What’s this argument all about, anyway?

      • economicminor says:

        The government doesn’t really issue dollars.

        New/additional Dollars are created in our system by new loans.

        The only other way was for the Fed to take debt onto its own balance sheet and issue dollars for it. I.E. in QE.. and removes them in QT.

        The Wealth Effect created by the Fed’s QE has made it easier for the government to borrow as assets values were bid up, creating lots of new additional dollars.

        Without the Fed intervening, all interest rates would have been a lot higher, house prices wouldn’t have done a moon shot, the government wouldn’t have been able to run its balance sheet to insanity and businesses like WeWorks wouldn’t exist.

        This abundance of dollars in the system ran up the cost of everything from commodities to commercial real estate. What it didn’t run up was the income of the average consumer (or the millions of retirees). This is the fly in the ointment. Because without the consumer, all this speculation on how the Fed moves on interest rates is like talking about a new fancy yacht when there isn’t any water to float it on.

        The fixes or non fixes both hurt the consumer. Higher rates hurt and so does inflation. Both remove consumption. (give it time!)

        I can not see how to land this plane when the runway is nothing but rocks.

        There is only one eventual outcome and that is a re-balancing of things. Meaning that a lot of existing debt will not be repaid and asset values in the end will be a lot lower.

    • JeffD says:

      “2) The Treasury market’s liquidity is already very shaky.”

      There is plenty that can be done to remedy that situation. For example, if the IRS ruled Treasury interest to be non-taxable what do you think would happen?

    • American Dream says:

      Markets crashed last year and the controlling democrats did just fine.

      If we accepted a higher inflation rate like you suggest 6%…. Then 10 year rates would need to go way up and then stocks would need to go way down based on risk free premium. It makes no sense

      There is no escape from this other then a magical decline I’m inflation and a return to ZIRP. This pivot crowd needs to start practicing…..Wingardium Leviosa Wingardium Leviosa Wingardium Leviosa

    • The Real Tony says:

      The stock market has been wrong for decades on end. Almost everyone today is a lot poorer than they were decades ago.

    • SocalJohn says:

      What a bunch of BS. Amazing. There is so much that is wrong in this gibberish. No problem for the govt to service the debt. None. Treasury market liquidity is outstanding. 2% is an arbitrary target, so why not make it lower? How about obeying the stability mandate? Then the target would be zero. The higher numbers you mention are completely absurd. Utter nonsense.

    • Cytotoxic says:

      “3) 2024 is a presidential election year. Tanking markets are bad for reelection prospects”

      Inflation is worse, especially if it becomes stagflation.

  5. Phoenix_Ikki says:

    Pow Pow needs to give the market some good old Singaporian caning to have a chance to tame this market. Right now market already priced in .25 rate hike next FOMC, unless he surprise the market with .50 or give another Jackson hole like speech. These market glue sniffers will just continue to give him the middle finger. Either case, will be interesting to see..

    • Pea Sea says:

      And we say it before every meeting, and at every meeting it doesn’t happen.

      • Captive says:

        @Pea Sea
        What do you mean? He upped rates around 400 points last year.

        It looks more like the market refusing to listen than Pow-Pow not doing his job.

        • Pea Sea says:

          What do I mean? I mean that in the comments section of this blog, and other blogs like it, the runup to every FOMC meeting brings out comment after comment predicting that the Fed will announce a greater-than-expected rate hike in order to show the markets that it means business. And it never happens.

          And it won’t happen this time. 25 basis points is the rate hike expected for next week’s meeting, and guess what? The rate hike announced at next week’s meeting will be 25 basis points.

  6. Seba says:

    “So we’ll have a week coming up where surly…”

    Think that was meant to say “surely”.

    Anyway, these articles are awesome primers for the FED meetings, Feb 1 should be interesting.

    • Wolf Richter says:

      “Surly frustrated central bankers” = irritable frustrated central bankers

      • andy says:

        Wolf, there is some unterestimg developments with Hinberburg Research shorting Adami empire out of India. This Adami guy came out of nowhere it seems as Asia’s richest man in 2022 (a la that curly guy of FTX fame).
        The stock looks like East India company from 1600s. Hinderburg alleges acconting fraud. Could be some interesting story in the making. Wish I knew how to short it – there is no ADR.

        • andy says:

          Sorry for the typos. Typed on my phone.

        • tolkapiam says:

          Adani group external borrowing denominated US$ trades in USA . Hindenburg has clearly informed thet he is short Adanai $ bonds.But Adani group is kind of goonda mafia Enterprise in collusion with ruling politicos. They went as far as raids by Govt enforcement agencies (ED, CBI) to shake the previous co’s managing Mumbai Intl airport and some other ports and took over ! Basically Govt Pension managing entitys like Life Insurance Corpn & Govt banks like State Bank of India has invested Billions of $ in Adani on phony collateral. Unless opposition parties make a big deal and takes to the street, the issue will be buried under the carpet.(Govt being forced to sacrifice Adani by arresting them via CBI & CD )

      • VintageVNvet says:

        10-4,,, and making ”revulsions” to… eh?

    • 91B20 1stCav (AUS) says:

      “…and don’t call me ‘Shirley’!!!”.

      may we all find a better day.

  7. curiouscat says:

    Who are these traders who are fighting the Fed? Large banks? Big firms like Vanguard and Fidelity telling retail clients to hold the course? Retirement funds?

    • American Dream says:

      I’m guessing the last week has been a good amount of retail investors AKA bag holders

    • SpencerG says:

      My guess is retirement funds… or the hedge funds that they hire. Not too many people want to play “Chicken” with the Fed using their own money.

    • The Real Tony says:

      The pump and dump artists.

    • dougzero says:

      I think inexperienced folks who don’t recall inflation are part of the fight. Jpow did a turnabout and lowered rates a few years ago, and if that is where your history stops(with no recall of 16% rates), you might think it is about time to do that again. The Fed fighters could not be more wrong. I think next week will be interesting.

    • SocalJohn says:

      Good question. I’d like to see a study of the impact of purchases by retirement programs. I’m concerned that they have destroyed whatever signaling value that markets had, regarding both the stock and bond markets. Maybe that is why they are so out of touch. Could be too much buying that is nondiscretionary.

  8. Brendan says:

    Such a great breakdown. Thank you Wolf.

  9. Gen Z says:

    The Bank of Canada stated that they are pausing rate hikes, but the FED wants to do two more later in the year?

    That would put the FED rate at around 5.25% at year-end while the BOC is at 4.50%, leading to a differential of about 75 basis points which favours the US dollar, and the US bonds being more profitable compared to the Canadian dollar.

    • Inno says:

      Anyone else hear that sucking sound?

    • The Real Tony says:

      Brampton and Milliken Mills might have something to do with that Bank of Canada pause. Real incomes are lower than stated incomes in those cities to obtain mortgages.

    • eg says:

      That BOC “pause” is as likely as anything else to be looking over their shoulder at what the Fed does at its next few meetings. Rare is the BOC that is comfortable getting too far out of touch with Fed policy.

    • tsuda says:

      BOC never said they are pausing. As Wolf’s article quoted accurately, as opposed to main stream media, they said they would pause if conditions are perfect, pinky swear, otherwise they will keep raising.

  10. Lucca says:

    This reminds me of an article I read in Barron’s a few months ago. It said history shows that the median time it takes to get inflation below 3% is 10 years. All this talk about a Fed pivot this year seems premature.

    • Alku says:

      good chart on this in Hussman’s latest piece.

      • Harry Houndstooth says:

        Hussman also notes that the recent relatively shallow decline in the markets from the peak overvaluation (greater than 1929 or 2000) is historically consistent. The big drop is ahead of us. Last month he also noted…

        But remember that the worst market losses tend to follow, not precede, the initial Fed pivot, because pivots typically occur at the point where “something just broke.”

    • If things get chaotic, which I don’t rule out, the Fed can pivot and unpivot. It could become a dance 💃 with a whirlwind. And yes, the Fed is the author of its own demise.

  11. grimp says:

    I’ll be in the cheap seats watching this week. No matter how many times the FED takes away the punchbowl, the party keeps on going. Will be interesting and I appreciate Wolf’s take on things. You don’t read it too many other places.

  12. SpencerG says:

    Wall Street is losing its mind.

    Normally there is a debate between the Fed “Hawks” and “Doves” over WHETHER or not to raise/lower rates. Right now the debate is over HOW FAST and HOW LONG to raise rates. Not exactly an environment where the “Masters of the Universe” are going to come out ahead since they keep expecting the Pivot to happen any day now.

    • Phoenix_Ikki says:

      The only thing the market is the master of is master of goal post moving and gaslighting. Intended target audience retail bagholders and the die hard believers and hypers like Cathie Woodshed and Tom Lee. Heard Woodshed reloaded some of her position in Tesla…

    • Captive says:

      I’m getting strong “eye of the storm” vibes lately. Everything feels eerily, and too quickly, calm and optimistic, like any second the hail is gonna come crashing down again.

      My experience is limited, so I could be wrong. Just a feeling, you know?

      • HowNow says:

        Captive, the sooner you get rid of “feelings” and rely strictly on “data” the better your financial health will feel.

        • Captive says:

          Fair advice, HowNow. I’m not playing the markets at all (still learning and watching), so I have the luxury of feelings.

          But out of curiosity, are you saying feelings aren’t informed by facts? I always assumed people developed reliable instincts as they became more experienced. For example, and this is an honest question from a novice – would you invest in something your gut told you was a mistake?

        • HowNow says:

          C., feelings and data co-exist and our feelings have gotten us from cave-dwelling to super yachts. But for investing, at this point in history, it’s much safer and likely more successful, to base your investment decisions almost completely on facts. Irrational exuberance can be a fact, too

        • Captive says:

          Thanks for taking the time, HowNow. I get exactly where you’re coming from.

          I’ll aim to make more reasoned posts in the future, and I’ll be more careful with my wording.

        • HowNow says:

          Captive, see the comment from “Here it comes”, below. He’s arguing that the market (and stocks) move based on sentiment, not fundamentals.
          You can also get a very different story from “Old School” (below). OS’s approach is more like mine.
          There are measures of sentiment that behavioral economists create. That info becomes data, and that data may also be useful.
          “Gut feelings” are good for online dating.

        • BobbleheadLincoln says:

          The market will often do the opposite of what you expect day to day and week to week. I think it plays to the powerful driving force of options derivatives which is currently largely fueled by fleecing amateur investors. A great way for big money to keep some liquidity and profit in this storm.

          It’s like a casino you think you can win because the data should make sense only to have it deny your instincts and rational judgement. This is on the short-term. Long term I think the market reality does win out.

      • random guy 62 says:

        I’ve had that bad eerie feeling since 2019, but am glad I didn’t use it as a basis for investing.

  13. Mr. Market says:

    – Lagarde is – in my opnion – signaling that negative interest rates in the Eurozone are not returning anytime soon.
    – Over there in the Eurozone the same financial, human & economic laws apply as here in the US, Canada & e.g. Australia. Therefore I expect e.g. german bond makret & bond rates to behave exactly as here in the US. So, the ECB will also follow the same/ a similar playbook as sketched out by me in posts earlier in this thread.

    • Wolf Richter says:

      You’re funny, I hafta admit.

      • crazytown says:

        You have to wonder what the motive of these guys even is to be posting this crap

        • Root Farmer says:


          “You have to wonder what the motive …,” the effectiveness of a mantra largely depends upon incessant repetition. Nothing against mantras, there’s good ones as well as delusional ones.

    • HowNow says:

      I’m beginning to think that negative interest rates are beneficial – reduce the money supply. Yes, that pushes money into assets, but eventually even those will go negative.

  14. 8_mile_road says:

    So Wolf, do you think a stock market crash next week after the FOMC meeting? I have been looking for a 600 pts fall on Dow Jones, or 300 pts fall on IXIC, for a while.

    The recently rally on stock markets makes no sense at all !

    • Wolf Richter says:

      A crash is 10%+ drop per day, in my book. No, I don’t expect a crash at all.

    • Mike R says:

      20% crash will occur starting next week, and go over the next 6 weeks or so. Mr. market will lose any fight against the Fed, this go around,

      If you want to know how bad earnings will be for the rest of 2023, just look at Intel. Look how far off they were from a year ago. Chips are in everything these days folks, over a year ago, Intel was forecasting they would start to catch supply up with demand in 2023. Well demand completely evaporated, and that they did not anticipate at all. So of course, now they now only caught up, but are in fact so far over supply, they are cutting back production . Massive sea change in a matter of months. The underlying economy has already fallen off a cliff and nobody sees it yet. When labor markets catch up to this, then things will get real ugly. Small businesses are getting plastered right now. Purse strings and wallets have been closed.

      • crazytown says:

        Intel makes crap, watch AMD to see how much was IT purchases being down overall vs Intel losing market share in datacenter while AMD has consistently gained for the past 4 years. Intel was terribly managed for 10 years and it’s going to take billions to get back on track.

        • Einhal says:

          What’s your basis for this? Intel still makes 76% of the personal PC market chips. That’s not to say they haven’t made mistakes, and not to say that AMD hasn’t made great strides (I’m a hobbyist who has built PCs with both), but to say that Intel makes crap is just ridiculous.

        • crazytown says:

          Intel does make crap. Rocket Lake was and Alder Lake is hot and use a ton of power. They boost wattage super high to hit the performance numbers they need to match AMD Zen and in servers they cannot match AMD in efficiency right now. They’ve been known in the past to use shady/illegal tactics to maintain market share too. Their architectures peaked at Haswell, after that they’ve had disasters at their fabs despite dumping billions to them. 14nm was late (Broadwell) and then 10nm was super late and never launched properly (Cannon Lake). Then they kept trying with 10nm, came out with a revised 10SF that actually worked. Then they renamed another revision of 10nm to 7nm to save face and now are trying to get 4nm (formerly what they were calling 7nm) going. It’s expensive, gonna be spending a lot of money on those fabs.

        • crazytown says:

          Also intels market share in x86 servers quite literally was 99% a few years ago. Thats where the profit is. They aren’t at 99% now, that’s why their stock has been punished and has gone nowhere for years and years and years.

        • tolkapiam says:

          There is some truth in this. I read in the layoffs dot com postings by intel employees that lots of lay offs are on the way in 2023 since dividends taking a big chunk of cash flow and loosing sales to AMD. I have Personally I bought 2 AMD laptops in the last 6 years not Intel.

        • Old school says:

          Anyone think it’s weird government is funding semi conductor investment in the US when the semis are posting bad results across the board?

        • Seen it all before, Bob says:

          Old School,

          The US government is very concerned that many of the chips used in weapons are manufactured overseas. The weapons, planes, tanks, etc are manufactured here but without the chips, they are useless.

          My opinion is if the US has a war with China, it will be a very short conventional war (before it goes nuclear). China will run out of weapons, and the US will run out of chips to make more weapons.

          China is trying to go into the weapons manufacturing business. Now the US is trying to go into the chips-making business.

          Russia has the same problem and will run out of chips to make more weapons.

      • The Real Tony says:

        Everyone already knew earnings would be horrible this year as far back as the middle of last year and the fraud stock market still went up this year. It’s just a traders’ market for the pumps and dumps.

        • Einhal says:

          It’s all part of the Wall Street gaslighting someone mentioned up above.

          It doesn’t matter if earnings were good or bad. It’s all about how they were relative to “expectations.” They set those low so that earnings can be “beating expectations” or “not as bad as feared.”

          It’s amazing to me that people still fall for this crap.

        • Iona says:

          Indeed, the profitless unicorns have rallied 30-60% or more. Quality of the stocks rallying let’s you know it’s merely a countertrend move. No strong new leadership indicating a new bull market. Add in earnings are middling at best save for energy and a few other outliers and it’s lights out soon enough. Decline in the dollar helped too. Look at the market in Hong Kong – to the moon!

      • Jon says:

        Powell would raise 25 based and send a dovish signal.

        This would make market surge higher.

      • ru82 says:

        ASML had a rose outlook for 2023. They make equipment that all the chipmakers use.

      • economicminor says:

        Magical Thinking = ignoring that both inflation and raising interest rates hurt consumption..

        I guess that happens to Pavlov’s dog economists.

        Follow the model, even when the data changes. The data is fake news and the model is always right because the model was always right for more than a decade?

    • Some Guy says:

      I know our esteemed host puts a lot of stock in market psychology, and I agree that matters in the short/medium run, but eventually I feel like it is a lagging indicator, and the amount of money floating around the system is the leading indicator.

      As long as rates rise and qt continues, the overall trend will be lower asset values, with the usual lack of straight-lininess in the path to heck as we have seen recently.

      Whether it happens fast (crash) or with a drip drip drip affects the blood pressure of the talking heads on MSNBC and daytraders, but shouldn’t trouble anyone else.

  15. Cookdoggie says:

    “ The ECB is determined to bring inflation “back to 2% [from 9.2% now] in a timely manner, and we are taking all the measures that we have to take in order to do that,” she said. Markets just brushed it off.”

    Seems like doing larger increases, starting them earlier, and setting expectations for a higher ending would better demonstrate “taking all measures” necessary. Their plan is timid.

    Ultimately, this fight is occurring because of too many instances of Fed Put. They created the skepticism, and only actions will change that. Their words mean nothing until they follow through. We don’t have positive real rates yet, nor have they had to stare down any crisis. Just finish the damn job and then talk all you want.

  16. Bobber says:

    Boy, that harsh 3.5% interest rate that Lagarde is contemplating is giving me the shivers. That’s one tough lady.

    • Wolf Richter says:


      That 3.5% is the rate projected for the third meeting this year. It’s not the final rate. The rate hikes will keep going but possibly at a slower pace, if inflation comes down as hoped … that’s what they’re saying. And if inflation doesn’t come down as hoped, if it bounces, just like it did in Australia, well then, that’s a new ballgame.

      • Bobber says:

        This is what happens when a madman like Mario Draghi says he’ll do “whatever it takes” to create inflation for a decade. Now some Eurozone countries have 20%.

        The central bankers are letting the world down by creating 20% in three years 2021 to 2023. That’s a permanent price increase that won’t ever be reversed, as long as they continue in power. They say it’s OK to have 20% inflation if you listen to their actions, but not OK to have 1% deflation. What a joke.

  17. Casual observer says:

    Wondering if the FED could announce an operation reverse twist. Where it sells long dated bonds and buys short dated ones? That should solve the yield curve inversion.

  18. Adam Smith says:

    Retired June 2017:
    Since then comparatively my Monthly/Yearly personal inflation overall due to:
    Ranch maintenance
    Horse feed & supplies
    All equals about $1,500 extra expenses from 2017 to now.
    Deduct the after tax inflation adjustments on $1,500 minus say $100 monthly increase I am still $1,400 in the whole on after tax income of about $6200 and you have +- 22% roughly more to live in Socialist SoCal.
    I am going to abandon California like Peter Theil and Elon Musk….
    Then I can eliminate this crazy inflation factor to live in “paradise.”

    • Ccat says:

      California has never been paradise and its always been overpriced due to its ridiculous zeal for zoning. People have a vision of the beautiful life in California due to the movies which are fantasies. It has a few nice spots which only the very rich own and the rest of it is way too poor, way too hot, way too cold, way too dry, and way too dirty. I live in the “rest of it” which is all I can afford but I travel alot to get clean from its wretchedness.

      • random guy 62 says:

        I am from a small rust belt town. Here it is flat, windy, and the temperature swings 110F across seasons every year, but my family’s roots are here, and the cost of living ain’t bad, so we stay.

        I took a drive down the West Coast for the first time on business in 2014. My reaction to California was nothing short of awestruck. I’ve been many places around the world, and it still is at/near the top of my list. It’s expensive because so many people want to be there.

        Living in comfort and beauty is not a right. Those that can’t afford it in Cali might just need to live their wage and move elsewhere. You can get a nice house in my home town for $100,000. The weather sucks, the schools are mediocre, and the view is covered in corn, but you get what you pay for.

        • 91B20 1stCav (AUS) says:

          random – much obliged, my friend. So many of the Golden State’s ills, like ANYWHERE, come down to supply and demand. Eventually, ANY ‘great place’ often succumbs to Master Berra’s observation: “…nobody goes there anymore, it’s too crowded…”.

          An area can be ‘loved to death’, or it’s common folks outcompeted for it by those with more resources, ’twas ever thus. It’s a constant challenge to accept becoming a periodic nomad or puzzling out the ways to dig in long-term.

          may we all find a better day.

      • Matt says:

        You must not get out much. Perhaps you need to go hike up to Lassen Peak, enjoy the waterfalls of the Sierra, surf in Carlsbad, spend some time off the 395, go see some poppy and lupine blooms in the spring, get lost along the Lost Coast, the list is long. Even here in San Diego. Better yet, don’t get out more. Just move so I don’t have to come across someone so bitter sounding.

        • 91B20 1stCav (AUS) says:

          Matt – sadly, the disaffected comments re: our state so often seem to echo the bitterness of a jilted lover whose affair never realized their fondly-held expectations. (…i never doubt, however, that the resultant heartbreak was real…).

          may we all find a better day.

  19. Julieb says:

    Bobber, is it a joke or you are serious?

    • Bobber says:

      I’m Joking. The only players shaking in their boots right now are high end speculators funding long-term assets with short-term financing, which is a mortal sin of finance, unless you enjoy bankruptcy or are big enough to create systematic issues and be eligible for government bailout support.

      • Bs ini says:

        Would agree with the short term financial engineering to fund long term assets but that’s what’s been happening in wallstreet and PE since QE started in earnest .

  20. MBP says:

    The CNN Fear and Greed index is suggesting “risk off” is going to hit once again in February or March. If so I suspect it might be the severest one yet.

    • andy says:

      I repurchased sizeable puts position in the last few days. Paid 1/3 the price I sold it for in December. Plan to add more once the market starts to roll over. The next leg down will be a hoot.

  21. Juliab says:

    The key takeaways from the December minutes were that “the monetary policy stance had to be tightened decisively and that the current configuration of interest rates and expectations embodied in market pricing was not sufficiently restrictive to bring inflation back to target in a timely manner”. Several ECB members were in favour of a 75bp rate hike (instead of the decided 50bp) and also preferred a fast pace for the reduction of reinvestments under the Asset Purchase Programme.

    ECB is far from done with rate hikes
    Looking ahead to future ECB meetings, it is clear that the central bank is far from being done with rate hikes.

    Admittedly, the recent drop in eurozone inflation has nothing to do with the ECB’s rate increases so far. The surge in inflation was mainly a result of higher energy prices, and the recent drop has consequently been driven by lower energy prices. Therefore, when predicting what the ECB will do next, it doesn’t make sense to analyse what the ECB should do but rather, what the bank is saying it will do. Hawkishness is no longer a characteristic of just a few ECB members; it is now the mainstream view.

    • Bobber says:

      Let’s step back. How can raising to 3.5% be hawkish, when inflation in many Eurozone countries is running higher than 15%.

  22. Michael Engel says:

    1) A 20y old curved econ 101 female student for $50K/ nite on Epstein
    island, for fun and entertainment only. The Curva said 0.25%. JP likes a 0.50% hike.
    2) Jamie Diamond wants to jump above Feb 2020 high.
    3) For 6 weeks the daily Dow and SPX failed to breach Dec 13 high, but NDX closed above it and above dma200. // The weekly Dow, SPX and NDX : after failing to close above Dec 12 high, for 7 weeks, they might give up and close below.
    4) The DOW might visit the 30K area, down below, for a sling shot up. After rising to a new all time high, the Dow will misbehave for a while, before moving higher.
    5) No recession.

    • The Real Tony says:

      I’m still waiting for the second shoe to drop from the ’87 crash. A retest of the 1987 lows.

      • Gattopardo says:

        With or without adjusting for inflation? No matter, either way, you’re a patient man, T. Might need to stay that way for a bit longer.

      • The Fake Tony says:

        It’s only been 36 years, I’m sure it will happen any day now.

        In 1987, the DOW closed out the year at a nice 1,939.
        I remember getting my Series-7 Brokerage lic. and Insurance lic. when the market ticked passed 2,000 and that was a big deal. lol.

  23. CC says:

    If they don’t fix Wallstreets corruption problem the economy will continue to tank regardless of rate changes.

  24. AB says:

    Which market?

    There is consensus between the bond market and the Fed that a landing is coming. The former (in addition to myself) leans towards hard and the latter towards soft.

    Whatever verbal posture the Fed wishes to adopt this week, it’s offering up a maximum of 0.75% in rate hikes by May. Not long ago, that was delivered in a month.

    It’s not clear to me why the structure of bond market curve is a source of surprise to anyone, given the consensus that a landing is coming. It’s very late in the cycle and we should be grateful for its insight.

    I don’t see how the bond market is in for a shock. The greater the tightening, the greater the severity of the landing. The bond market will price accordingly.

    At this moment in time, the Fed has to mimic the bond market. To do otherwise, will shine a light on its loss of influence. It’s lost control of the yield curve, not to the market, but to the gravitational laws of economics that it impressively but egregiously and negligently defied for so long.

    The long end of the bond market is sober and bargain hunting on a forward timeframe.

    The stock market is dizzy, fickle and speculating from one FOMC and Earnings Season to the next. It’s way out from reality on a forward timeframe.

    Follow the bond market.

    • Wolf Richter says:

      “Follow the bond market.”

      Hahaha, the bond market is completely idiotic. For example, in August 2020, it forecast that the 10-year yield would drop below 0% and turn negative, at which time the 10-year yield was 0.5%. People who believed this BS about “follow the bond market” got wiped out over the 2.5 years since then. So yes, by all means, follow the bond market.

      • AB says:

        When investors in housing get “wiped out over the next 2.5 years”, I may suggest then that it’s a good time to buy.

        Thankfully, any such post will be time- stamped with a date in 2025 and will not by preference be retrofitted to 2023.

  25. Winston says:

    Is this why our markets are stupid, acting on superficial cues rather than deep analysis?:

    “American markets and European markets generally have a higher proportion of algorithmic trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets.”

    I wonder what percent it is now.

  26. Big Jim says:

    I absolutely LOVE reading Wolf’s material. But I LOVE his reader comments, and back ‘n forth even more.

    One thing I believe I can say with absolute certainty: this is going to be an interesting week! Good luck to all.

    • Seen it all before, Bob says:

      Wolf is awesome with his data and an awesome moderator!

      Thank you, Wolf!

  27. Dr Duration says:

    This inflation rate battle is shaping up like a fight between a young alcoholic (druggie) at a casino arguing to take the keys away from their parent (who has dementia and a broken hip) and a (short tempered) police officer that’s just worked a double shift. As the yelling and hostility accelerate an increasingly large (agitated) crowd gathers around the escalating tension, as backup police arrive, confronting the unfolding chaos. The canine police dogs quickly assume their role as public servants, executing crowd control services, resulting in the established routine of grandpa being escorted back to his bingo parlor and junior being dropped off at a local bar.

  28. Curie says:

    So sick and tired of ‘the markets’ BS. It is not ‘the markets’ that fight the Central Bankers, it is the whole global elite demeanor, clearly not unconcerned since they own the Central Bankers in the first place.
    Until some SHTF event (another medical global emergency or mordor pressing the red button nuking the gentle eleven kingdoms to the west) there will be no meaningful repricing of anything. Things are not looking bright because the whole capitalist growth model just hit the ceiling of the physical limits of this rock we call Earth. Too many humans too few resources and the trent is accelerating. Meanwhile we can chat about hot air shit like ‘the markets’ etc. It is highly unlikely that we will get another opportunity to ride the wave of appreciating assets like in 2009 and 2020. Surely everyone and their grandma is waiting for, sitting on their pile of depreciating cash or real estate which is worth precisely as much as the local law and order situation allows. I am afraid that anything coming in the future will be shaped by the SHTF event mentioned previously.

    • 91B20 1stCav (AUS) says:

      “…it’s HAPPENING, Reg, it’s HAPPENING!!!…”

      may we all find a better day.

  29. LordSunbeamTheThird says:

    Central bankers make announcements about rate rises because if they are believed, then they don’t have to make the rate rise…

    Eventually this is just the boy crying wolf.

    The coming “rate rises”are a bluff to manipulate the market and considering even if they do proceed real rates will still be negative.
    In the press I mainly read which is the UK, nobody believes Lagarde is going to raise rates (or that she even can).

    There is no point listening to her, and thats a huge lever of control to lose. There is additionally 750bn euros coming in as part of dubious legality ECB borrowing (which will to everybodies amazement be used to cap yields), yet apparently there isn’t even a legal mechanism to get this back from the member states (or Germany as it would mainly be).

    ECB is playing serious “whack-a-mole” already, to cap yields. Euro is going deeper into a hole but disguising with smoke and mirrors.
    I don’t see what the ECB can do. Weirdly if you point this out to a remainer, the fact despite our own issues we should be standing away from this bomb, they always look bemused they never consider Eurozone debt.

  30. Dax says:

    Let see if current earnings can support and anchor the last 4 weeks melt-up pain trade. Planking is what markets do, and this market seems content to build this scaffolding on any whatever limited footing can get hyped.

    How much of the last two years SPX500 earnings were part of the Fiscal Covid relief and infrastructure appropriations and easy money?? The current consensus 2023 SPX500 earning of $228 and 2024 of $252 is just too JUICY to not be substantially position long in the game, and absolutely affirms that the forward view is NOT recessionary.

    Difficult to say long can the prior 10 years of HOT EASY monies can continue to underpin optimism and support these elevated markets? With financial conditions remaining very sound (record low debt failures), it beckons investors to get on board and not miss the train.

    Now earnings have become the new “PUNCH BOWL” , it’ll take a revision to estimates into the high 100’s earnings to remove the persistent FOMO in this pain trade… that’s going to take a couple of declining quarters. All wealth assets are proving to be very sticky downward.

    • The Real Tony says:

      Rewriting the definition of earnings higher like mark to malarkey instead of mark to market is like rewriting the definition of inflation lower. Earnings didn’t go higher and inflation didn’t go lower.

  31. Michael Engel says:

    JP : Inflation is slowing, but the risk of default is growing.

  32. Old school says:

    Money is fungible. Japan central bank has caused a pause in the world wide QT the last 2 – 3 months (Yardenni chart). Maybe that caused some risk-on behavior in stock market. It’s a complicated puzzle.

    I looked at composition of my vanguard account. It’s a little over half repurchase agreements now. Current rate 4.29%. Interest rate increases have increased my total spendable income by about 2.5X. So higher rates is a complicated way to cool economy.

    • El Katz says:

      We have more spendable income as well for similar reasons. But we see no need to change our spending habits.

      However, many people are not in a position to take advantage of the higher interest rates to enhance their income to any meaningful degree. And those that do, could simply be striving for parity because they didn’t want to play in the “casino” and missed out on the increases playing the market provided. The last sentence describes us.

  33. JOC says:

    As I read the article and comments, there seems to be a lot of faith in the omniscience of Central Bankers and a lot of disdain for markets. There may very well be a smackdown this week, but in the end, are you going to trust several hundred Ph.D. economists or the collective judgment of millions of market participants with real money at stake? Tie goes to markets, IMO.

  34. Here it comes says:

    Again here we are seeing so many comments about the market making no logical sense. I’m just gonna post this again: the markets are not controlled by the Fed, and fundamentals are not a part of the market in the short term.

    You have to come up with some way of divorcing yourself from your own biases. The market is driven by sentiment, not whether it makes sense. The idea of “don’t fight the Fed” is silly because the Fed is not in control of the market. The market is in control of the market.

    It’s not that the Fed is irrelevant, but that from a fundamental standpoint what the Fed does takes a long time to impact the market in any actual way. The sentiment of what the Fed says, however, can be seen immediately, and is disconnected from the content of what was actually said. This is why the market can move strongly in one direction, when the Fed has their announcement, and move in the exact opposite direction when the Fed releases their notes that say the exact same thing they said that their meeting.

    I have known very smart and educated people with degrees in accounting and business who have worked at major firms, and they absolutely suck at investing and understanding the market. They are total experts on fundamentals. But the problem is the market doesn’t work on fundamentals. And in reality that knowledge actually works against you because sentiment often is the opposite of logic.

    To everyone who says this doesn’t make sense I ask you rather than throwing your hands up and saying the market is crazy, try to learn analysis methods that focus on sentiment, and not fundamentals. I promise you, you will be shocked that you actually can completely ignore the fundamentals and noise of the news media, and simply analyze a chart.

    • Dr Duration says:

      Re: from a fundamental standpoint

      From a fundamental standpoint, businesses will eventually have to decrease profitability because of this ridiculous Fed rate hike stuff, and that will make it increasingly less logical to hold stocks that decline in future value. However, short-term bets within a riskier range, will continue as the casino becomes far less liquid.

    • andy says:

      Some circular logic you got there. Well done.

      Aren’t you the Mr. Profit calling everyone to go long last year just before the next leg down. Because you’re not there to be right or wrong, but to make profit, right?

      My apologies if I’m mistaken you for someone else.

    • The Real Tony says:

      I think the word you’re looking for is “rigged” Stock markets around the world have gone nowhere the past decade but for some strange reason the U.S. stock market has risen without the U.S. dollar imploding the last decade.

      • RedRaider says:

        Could be due to money flow into the USA. The USA stock/bond markets could be acting as safe haven.

        The USA markets are in bad shape but the others are even worse.

    • Old school says:

      You can make money many ways in the market. Buffet makes money on fundamentals and relatively predictable long term cash flows. So do a lot of investors.

      I agree a market price isn’t necessarily related to fundamentals, especially when Fed is stuffing the world with money or when there is a panic.

  35. eg says:

    I for one look very much forward to a market smack down.

    • butters says:

      I think we will be sorely disappointed. The world is full of crazies, and they will have the last laugh I am afraid.

    • andy says:

      Same here. My worry is Amazon and Google feel like they’re about to break out to upside. So the next leg down may be delayed a bit.

    • Pea Sea says:

      I expect the market to continue to gleefully spit in the Fed’s face as it has done for months now. I would love to be wrong, but I don’t think I am. There’s not much an institution can do once it’s lost its credibility.

  36. Arya Stark says:

    I give you credit for sticking to your guns Wolf I read you and the Market Ticker religiously and you both are the lone voices in a sea of bullshit. It’s not easy going against a massive narrative.

    • butters says:

      Worse, we are believing a liar like Powell to bring some sanity. I am convinced, NOT happening.

  37. Old Ghost says:

    A lot of people here are anticipating a “pivot”. That sucking sound they hear is the weakest asset bubbles being deflated.

    Many seem not to realize the Federal Reserve is a privately owned monopoly, I don’t expect any sort of “pivot” until the assets of the 1% are feeling the pain of deflation. Then something may change. Until then, circkets.

  38. Dr Duration says:

    At this stage of smack down forecasting, I think we all need to take a deep breath (calm the f down) and begin a serious process of gaining perspective, by asking ChatGPT to get us all on the same page, even if we all get slightly different answers.

    I feel confident that market related uncertainty, economic confusion and conflicting narratives circle back to astrological forecasting from last year, where a consensus was reached, indicating that future is bleak.

    I’m also confident that current enthusiasm for AI novelty will take the shape of a new exciting Tulip Bubble, which will pump to explosive size, then collapse into a pile of gooey excrement. May the buyer beware…


  39. Michael Engel says:

    1) US2Y – US3M = (-)0.54. Demand for the 2Y is high, because the risk of
    recession is high. On Wed, the 2Y might rise, before dropping to close Sept 12/19 2022 gap, or test Nov 2018 high.
    2) Meanwhile, US treasury will be on diet. If the fear of recession flip with fear of default the 2Y will pop.
    3) If we can’t get along until congress summer break, the 3M, in a sling shot, might rip it’s anchor to fedrate and the 10Y will fly to levels never seen before.
    4) U cannot glue a broken beer mug.

  40. Kevin W says:

    “One of the nasty surprises that inflation dished out a couple of days ago was in Australia, where the annual inflation rate accelerated to 7.8% in the fourth quarter, up from 7.3% in the third quarter, which caused some revulsions in the money markets, as they priced in another rate hike.”


    Is it possible the word “reversions” was intended here? Tho credit markets have indeed been repulsive and revolting, true enough.

    • Wolf Richter says:

      No. “revulsion” = sudden and violent change.

      What is it today with English? One reader of this article doesn’t know the word “surly,” and fails to look it up, and thinks it should be “surely,” and the next reader doesn’t know the word “revulsion,” and fails to look it up, and thinks it should be “reversion.”

      People, you can now google words that you don’t know, and often a definition or a link to a dictionary will pop up. A lot faster than looking stuff up in an old paper dictionary. These days, you don’t even need to buy a dictionary. It’s all free on line. Take advantage of it.

      • Ace says:

        So many people don’t know the difference between “your” and “you’re” or “their” and “there.” It’s annoying, but what are you going to do? Don’t waste your time responding.

        • Wolf Richter says:

          Most people do know the difference, but it’s easy to make typos of this kind, and it’s hard to catch them because “their” and “there” look close enough, and your brain sees what it wants to see, not what is there. That’s why catching typos in your own text is hard, and catching them in someone else’s text is a lot easier, which is why writers need proofreaders.

          In the comments, typos are ignored, forgiven, and forgotten on the spot.

        • 91B20 1stCav (AUS) says:

          …have noticed that my email program is now continually trying to ‘help’ me, especially with spell check and when I use apostrophes, causing repetitive and still-imperfect proofing on my part…

          may we all find a better day.

        • Root Farmer says:


          A sign of a newer reader. Everyone has a different writing style and yours is distinct. After awhile, most readers seem to tune in pretty quick. With increasing popularity, (see the Wolf for Fed chair movement), you can expect more of this. Please, keep it coming!

        • HowNow says:

          “Why can’t the English teach their children how to speak?”

        • 91B20 1stCav (AUS) says:

          How – ‘eh’ not ‘aye’, ‘oh’ not ‘ow’?

          may we all find a better day.

  41. Cocci7 says:

    Aren’t most people getting a pay raise early in the year (inflation adjustment and performance bonus)? With China waking up, why would inflation not surge again?

    • butters says:

      Nah most people’s raises don’t match the inflation rate. Performance bonuses are also going to be less than previous yrs for most.

      China opening, ya that could add to inflation.

    • RH says:

      Waking up? The latest US-EU chip export protections and prohibition against Americans working there just buried tech industry in China, not that it was great before. LOL Their economy, not just their people, need ICU level care.

      Look at their unintentionally hilarious, major-CCP-company “demonstration” in Thai expo of “Zara AI” or “Sara AI” that is clearly a Thai woman answering questions whose image is made to appear computer-created on a screen by basic poor, motion capture used for years in Hollywood movies and US Unreal engine game tech with quality levels from the 2000s to fool gullible, foreign investors into giving them money. Pathetic!

      An alleged “Chinese AI” that only speaks English (poorly) and Thai (well.) Really? Shameless! I almost choked on my breakfast laughing when I saw the video of the alleged CCP-crooks’ “AI” demo. What is next, hand puppets?

      The dumb foreign investors are fooled by a trick (different only in then using small persons in a statute or metal suit) that dates back to the middle ages: pretending to animate a robot or magic statute. LOL Will all CCP companies soon be revealed to be similar scams?

  42. Ace says:

    Inflation is still a huge big problem. I don’t see prices coming down anywhere. Not at the supermarket, not at the hardware store, not online. Even on Amazon and Ebay, nearly everything I bought two years ago is a lot more expensive now. Many items have increased 50% or more. I went to a Staples to buy legal pads and a calendar, I walked out.
    Very expensive store, I don’t know how anyone buys anything at Staples.
    Food prices are ridiculous, and it’s not just eggs. $4.59 for cream cheese? Seriously? Frozen foods that were $3.59 are now $5.49, and oh by the way, you now get smaller portions. Actually, I’m glad, I have stopped eating frozen foods, they are loaded with fat and ridiculous amounts of sodium, so inflation has made me a little healthier. Lay’s potato chips are a joke. You used to get 11 ounces, now you get 7 3/4 ounces, and you pay more for it. No more Lay’s potato chips for me.
    Paper towels and toilet paper, I’m sure I don’t have to tell anyone how much they have gone up. I better stop with my inflation rant, or I will be here all day.
    As for the financial markets, it’s another lost decade. I don’t know what will happen this year, statistically stocks are a favorite to have an up year following a down year, 1973-74 was the last time stocks were down two consecutive years. (Of course, you could make the case that they are way overdue to fall two years in a row again.) Most assets are still in bubble land. Tech stocks in particular had very outsized gains for over a decade, and still have charts that look like Mount Everest, and most still have very high P/Es. I think the QQQ is not even close to finding a bottom. The S&P will make a new low also, if not this year, then next year. If there is going to be a “big reset” of valuations, then is it all over and done with now? I don’t think so. The S&P spent a total of less than two months in bear market territory.
    Covid, inflation, war, it just looks and feels like another lost decade.
    If the third major asset bubble in 20 years is going to deflate, this is it.
    It’s time for a very big reversion to the mean. It has already begun.

    • billytrip says:

      I agree that prices are not coming down (well lumber is finally getting reasonable) but I’m not sure that is the test. If prices stay where they are for the next several months, is that not ending inflation?

      Said another way, I’m not sure the goal is price reversal, it is to stop ongoing increases. I am afraid that most of these price increases are here to stay.

    • Natron says:

      Looking at past data most ‘lost decades’ seem to end up being (very) long term sideways action with short term bear markets in it followed by see-saw price action. Strikes me that if 80-90% of the market is owned by the oligarchy types why would they need to sell in bulk? And where would they put the money? With various asset types moving in tandem these days it could end up just being a churn.

  43. CreditGB says:

    Fed telling the markets to ease up is like arguing with FTX sycophants that they are about to lose their arses. The difference, if any, between the FOMO market crowd and FTX sycophants is barely discernable at times.

  44. Michael Engel says:

    During the lock down people cooked at home. Home cooking, especially
    hog cooking, is more dangerous than coal plants and cow farting.

  45. sunny129 says:

    GFC happened right after Federal Reserve started raising interest rates, ever so gently, incrementally, in a series of steps, 25 basis points at a time(2005, 2006 and 2007). It brought the interest rates up to something like 5.25%.
    That was enough to burst the financial bubble, essentially

    Until rate increases to 5.25% or above, my credibility of Fed is on hold. That’s when this ‘everything bubble’ will burst first slowly and then suddenly.
    How long the ‘front running’ (based on perception and hopium) will go on after 5.25%, is yet to be determined! My fingers remain crossed

  46. Dr Duration says:

    As a Luddite, I’m forbidden use of ChatGpT, thus hopelessly locked into a world based upon useless time loops.

    Precisely because of that, I can use the past as a modeling agent to help me envision how future outcomes will evolve, like seeing the Fed as a father figure, who has to discipline a child, as a last-ditch effort to imbue an important lesson. It’s the matter of tuff luv that hasn’t sunk in, and just seems to go in one ear and out the other, with virtually nothing being processed (by the markets). The father wonders aloud if the child is deaf or just too willful, too arrogant, too disrespectful, testing patience beyond limits.

    A good whipping is probably best and necessary to set a precedent and send a message that there’s a line that can’t be crossed.

    Ok, we all know, Dad is gonna go easy and cave in and play jellyfish and melt into a spineless puddle of embarrassment, that’s not only awkward but painstakingly more uncomfortable than the spanking that would have been far more appropriate.

    Ok, the Fed inflation thing, it doesn’t matter, because this is really Powell versus the universe, and as we saw repeatedly with the trump bullying episodes, nothing will happen here, things won’t be resolved by small, timid rate hikes, or more hesitation.

    The soft landing is about soft consumer demand and soft revenue, soft profitability, soft easy to digest pablum that’s so easy and effortless, so empty, so non committal, so ineffective and inefficient — but, it buys time and more importantly, by dragging out this soap opera, it allows wall street to churn accounts and monetize volatility, like a perpetual motion machine!

    It’s never going to be a hard landing, it’s going to be a very long period of going sideways, while the Fed helps wall street but time.

    I was trying to make some connection about time and brains going to mush, but lost my train of thought….

    Also see:

    With all their needs and desires perfectly fulfilled, the Eloi have slowly become dissolute and naive: they are described as smaller than modern humans, with shoulder-length curly hair, pointed chins, large eyes, small ears, small mouths with bright red thin lips, and sub-human intelligence. They do not perform much work, except to feed, play, and mate, and are characterized by apathy; and when Weena falls into a river, none of the other Eloi help her (she is rescued instead by the Time Traveller).


  47. A Powers says:

    Market Liquidity = Fed Balance Sheet – TGA account- RRP

    TGA= treasury general account
    RRP= Reverse repo at fed

    Couple of hundred billion left in the TGA to goose markets and eventually the reverse repo the banks have on loan with the Fed will need to be released into the world. The banks are great big batteries storing up inflation to be released in the future.

    So what if interest rates stay at 5% when you’ve got trillions still left to be released? (earning interest no less!!!_)

    Gold and the markets are rising because money is being provided to them by the Fed system. I’m not sure how raising interest rates will reduce the Fed balance sheet.

    I keep reading article after article about how there will also be (is?) stealth QE on top of the above observations.

    The Fed funds rate is a distraction. The Fed says one thing and does another. When I actually see their balance sheet drop by 30% I’ll believe them. How can you fight the Fed, when the Fed is handing you money?

  48. Bennee H.Ana says:

    8%, 10%, 14% ! The Fed needs to hike like they mean it. The sooner the better because that means the market can stabilize earlier instead of spreading this correction out over years.

    These tiny increments are what is making people think it’s just a joke.

    We need to see house flippers and fat baby boomers in the streets bleeding equity from their crows feet encrusted baggy eyes.

    There are over 150,000 homeless people just here in Calif. and roughly the same number of empty “investment” homes between SanFran. , L.A. and other prime areas. That’s not acceptable. Houses are for people to LIVE IN. Higher interest rates equates to lower house prices and we have a LONG way to go.

    It’s over for high flying real estate markets BECAUSE the population numbers continue to decline, and not just in the U.S.

    Also, the stats are showing that an UNUSUAL amount of buying and selling transactions are happening among the over 50 crowd. Probably boomers playing the bigger-is-better-and-I-need-to-show-off game.
    The younger generation isn’t impressed.

    We also need the UBI program instituted, especially for the poorest. That’s the only way the real estate market is ever going to stay float with bots and AI taking over numerous front line jobs.

    • Receo says:

      “The younger generation isn’t impressed.”

      Believe me, we’re not impressed with you, either!

    • Tyler says:

      You had me until “We also need the UBI program instituted”

    • Swamp Creature says:

      Bennee H.Ana

      Instead of UBI we need to end the draft and bring back universal military service. Three years of mandated service for every abled body man AND woman in this country. The Gipper’s major mistake was ending the draft. After the 3 years of service many of the job skills would be directly transferable to the civilian sector.

  49. harry hv says:

    Inflation is 8.5% so an interest rate of 4.5% is a bargain.

    Why all this handwringing about whether the Fed is aiming for a (real) interest rate of negative 4% or whether they will “pivot” to negative 5% ?

    The outcome will be the same, the govt will outspend the tax take, the Fed will print up the difference and ensure that real rates are solidly negative for the foreseeable. The Banana Republic recipe.

    • Wolf Richter says:

      You need to update your knowledge about inflation rates. You’re a bunch of months behind.

      • Hofstead says:

        People think in terms of yearly rates, not month over month. I look at my yearly food, insurances, and other and see them up 15%! My salary did not rise 15% and it probably won’t for years to come because economists say – hey, look the inflation rate is coming down!

        Who cares about the inflation rate! You reduced my standard of living by 15%!!! I won’t get that back. My house has probably dropped over 15% in value by now.

        The Fed needs to raise rates above the inflation rate to make a difference!

  50. Bull&Bear says:

    Wolf, one question about the debt limit. The Treasury department has hit the debt limit, but I can still buy the treasuries on the TreasuryDirect website, i.e. US government still borrows my money. What is the mechanism there that I am not catching?

    • Wolf Richter says:

      Yes, we just bought some bills last week. The government takes in the contributions to Social Security and other government pension funds, so it gets the cash, but it doesn’t issue the special nonmarketable securities that these funds invest in. Once the debt ceiling is lifted, the government will issue those special securities overnight, and the next day, the total government debt jumps by $500 billion, but the publicly traded debt doesn’t change at all. This scheme works for months, and then it too runs out of runway.

  51. havingfun says:

    Just watched David Rosenberg, now back home in Canada. Often considered a permabear, he’s sounding marginally positive starting last qtr of this year.
    His thesis, supply chain now near normal, thus supply up, meanwhile Powell has crushed demand, think houses, cars, thus oversupply, price weakness. In general, prices of ‘goods’ will not be inflationary.
    He suggests rents, a major part of indexes, which will show higher from here because of stats system, will, within 6 months, start to reflect large supply of new build houses, apts scheduled to hit mkt (ie, again, supply back to normal ).
    Much more to his presentation of course….gist is that inflation will, is, dropping faster than people realize…..he also suggests that QT adds another 1/2 or 1 % (sorry, can’t remember) to effect of interest rates on economy.
    Great presentation, worth a look see.
    Where there’s disagreement Wolf, with your take, it’s on the rapidity of change, ie the diminishing of inflation.
    Btw, BoC raised interest rates a quarter point January 25, and announced a ‘conditional pause’ on hikes.

  52. Giorgio says:

    If you want to see how the economy is doing, look at the bond market. the Federal Reserve is just smoke. The Federal Reserve has never been able to predict a single recession. Central banks will have to follow what the bond market says. Personally, I am sure that we are now nearing the end of the rate hikes and the Federal Reserve will be forced to cut rates by September because it will face a great recession…as “someone” said..recession by any definition.

    • Wolf Richter says:


      There is a really important concept you need to get if you want to understand what the Fed is doing and why: The Fed AIMS to trigger a downturn in demand (recession) in order to get inflation under control. A mild recession is the GOAL of the rate hikes. IT’s not going to cut rates into the teeth of this inflation. It’s going to cut rates if inflation shows “compelling” evidence that it’s headed back to 2%; it’s not going to cut rates if this inflation persists, even if there is recession.

      By now most people understand that this inflation will not go away without a recession, and even a mild recession may not be enough to knock out this inflation.

      • VintageVNvet says:

        EXACTLY Wolf!
        Have been commenting on here a couple years now IIRC, and, so far, most on here don’t want to see what is really happening with FRB and various ”markets.”
        Having seen and lived through the last couple ”crashes” and recoveries as a tax paying adult, and several more before that as a kid listening to parents and grandparents, some of whom were living ”only” on SS and/or annuities and were very vocal about the challenges of those times, I can only hope and pray for all our brothers and sisters now ONLY on SS, etc….
        They, my elders of the last two generations, were ”ABSOLUTELY” hoping for another ”depression/recession” to make their fixed or low raises retirement income worth more again.
        WE, in this case the family WE, are hoping similarly so that our cottage will be worth enough to enable us to go back to far our ”rural” preferences when our very elderly parents, in the same house since 1950s, kick out of this sphere… etc., etc.

  53. ru82 says:

    Well you fight inflation by given everyone a big raise.

    For 2023, the percentage is fixed at 11.08%. This means that on 1 January 2023, the salaries of all their Belgian white-collar employees (without exceptions) are to be increased by 11.08% as to be applied immediately in the payroll of January 2023

    • Bobber says:

      I hope you are joking. If not, Belgium is in trouble.

      • Wolf Richter says:

        Wages in Belgium are indexed to an inflation measure. Inflation in Belgium has been above 10% for the past six months, going as high as 13%. These wage hikes (indexed to inflation) are designed to keep wages from falling further behind inflation.

        • crazytown says:

          Sounds kinda nice. Let’s assets take the blow of fighting inflation instead of wage earners. As far as I can tell, the Fed’s goal is to slap wage earners to stop inflation.

  54. Spencer says:

    Tell me how the FED’s going to lower policy rates when there are > 2 trillion in O/N RRPs?

  55. Juliab says:

    It’s not a joke this is the low in Belgiun

  56. ru82 says:

    I have to add that the massive 70% drop in nagtgas has also helped tame inflation. Considering the crash happen right at the coldest time of winter is huge.

    I am not sure if I have ever seen nat gas crash that far and that fast.

    • Wolf Richter says:

      Most power generators and companies that use natural gas as feedstock hedge much of their NG demand over the long term, and for them, that spike in natural gas prices didn’t hit them as hard because they’d locked in their costs months and years earlier, and so now for them, prices aren’t a lot lower either. That’s why the spike in natural gas prices didn’t translate into an equal spike in related goods and services at the consumer level, and that’s why the decline is now not as impactful either.

      Gasoline is a different matter; it’s sold at retail directly to consumers. Gasoline prices have been surging for five weeks in a row.

    • rojogrande says:

      We just got our December gas bill from SoCal Gas. They have a commodity unit charge for the gas which is separate from the delivery charge. This was by far our most expensive gas bill ever. Out of curiosity, I looked up our December bill from last year (2021) and the commodity unit charge went from $.84 to $2.01. Maybe we’ll benefit from the drop in wholesale gas prices at some future time, but the retail price here is still way higher than last year.

      • rojogrande says:

        It looks like the future is now. I just saw this headline today:

        “SoCalGas could announce big drop in natural gas rates this week”

  57. Harry Houndstooth says:

    Monday , January 30, 2023

    Missing the top?

    That’s it?

    No spectacular blow off top in one market after another?

    Did the Russell 2000 just make a feeble head and shoulders in blow offs?

    I hate to admit that I have 75% of my trading capital in money market, but it seems to me, if we are going to have a spectacular blow off top, it should be happening shortly.

    Wouldn’t be a hoot if the peak comes at the beginning of Powell’s communication.

    25% mostly in SQQQ but also SRTY and SPXU

    • Harry Houndstooth says:

      Wouldn’t it be a hoot if the peak comes at the beginning of Powell’s communication.

    • David Hall says:

      I was buying corporate bonds Sept – Oct for my bond collection. Found some 6.5% to 7% YTM bonds (BBB). In the past, I held most of my bonds and CD’s to maturity. It had been years since I saw deals like these. Looking for a bottom to form? Hard to see it until time has passed and you look backwards. I have a low expense ratio variable annuity containing index funds.

      Worried about OPEC? India is burning coal to make electricity and may switch to electric cars . They can not afford to do as much for their ESG rating. China is aging. Japan peaked in 1990. They used to sell transistor radios. The Japanese have a longer life expectancy than Americans. They have a lower body mass index avg.

      In 2022 global ocean temperatures were the warmest on record. More storms ahead.

    • Harry Houndstooth says:

      Update January 31, 2023 afterhours… 16:18

      Nasdaq 100 no longer leading the markets upward.

      Russell 2000 busts out new recent high… The Dogs are Barking.
      Buying SRTY in the aftermarket. 40.69

      Any drop in SRTY below 40 will be met with vigorous purchasing from me.

      • Harry Houndstooth says:

        Also bought SDOW … 24.86, I would rather own SDOW to trade than 3.76% money market. Finally, we have a reasonable tape measure on our alternative to investing in equities.

  58. Dr Duration says:

    Undeniably, at the heart of this Fed smacking-down theme, is the theme of ambiguity and hesitation. Is there any living sentient creatures on earth who can disagree that the Fed acted like deers in the headlights, in their original transitory inflation narrative?

    Instead of allowing Powell to take full credit for the Fed consensus collective thinking, let’s just say they got it wrong and then failed to act, because they were either over confident in misguided assumptions, or they didn’t have the analytical ability to interpret economic conditions.

    Sadly, the metaphorical comparison here is between the Fed process and ChatGpTs limitations of model processing — that end up mirroring sycophantic, one-dimensional thoughts, where the narrowly framed questions are answered with simplistic answers.

    Skipping ahead, with my two cents, it’s obvious the Fed will go for the quarter percent hike, shocking nobody, but, perhaps laying the groundwork for more hikes later, which will eventually feel like water boarding to equity enthusiasts. That slow, steady drip of small additives will be akin to water rising behind a very fragile dam, that’s not structurally engineered to withstand the sustained pressure from the cumulative load.

    That’s what I see on my bingo card, but, this little drama does have the additional baggage of Powell speaking and expanding upon the anemic rate hike. God forbid he’d suggest that people that are partying above and below the dam, take prudent precautions and focus on increasing risks, versus focusing on the next snort of cocaine….

    It’s continually unclear, if daddy Powell will be gentle and loving or harsh, but for this analysis, we need to be thinking in deeper Shakespearean terms. Does Powell want to kill the bubbles and subdue excess speculative market insanity, or does he nurture the casino participants and coddle them with a familiar embrace, the hug that’s felt so good, for decades, the hug that’s nudged the economy to the brink of failure? Do we get a green light that more cocaine and unlimited drinks and more nonstop orgies, or do we hesitate indecisively and dither about what’s right? And of course, we can’t forget the dynamics of the debt crisis, so that probably adds to the touchy feelings and anxiety that just seems to be continually squeamish and challenging.

    “Prince Hamlet, throughout the play ponders and procrastinates the task of killing Claudius, to avenge his father’s murder. Freud proposes that Hamlet is unable to make up his mind to kill Claudius owing to his own Oedipus Complex the repressed but continuing presence in the adult’s unconscious, of the male infant’s desire to possess his mother and do away with his rival, the father.”*


  59. Giorgio says:

    15 February 2007. The yield Curve (10yr/3Mo) was inverted -0.6%. Today it’s -1.21%!! New York Times: ” Fed chairman projects ‘soft landing’ for U.S. economy – The chairman of the Federal Reserve Board, Ben Bernanke, has given Congress an upbeat view of the U.S. economy, predicting that unemployment was likely to remain low over the next two years even as inflation declined slightly. -Bernanke’s comments Wednesday, which suggested that he is comfortable with interest rates at current levels, immediately lifted U.S. stock markets. – The U.S. economy appears to be making a transition from the rapid rate of expansion experienced over the preceding several years to a more sustainable average pace of growth,” he told lawmakers – I INSIST: The Federal Reserve is always wrong – Don’t Fight the BOND MARKET! – Time will speak!

  60. Bill U says:

    This is all about crushing workers. Nothing short of class war.

  61. Nate says:

    Ladies and gentleman, I have a prediction!!!

    The Fed will raise rates by .25 and harsh language. The market will go up and down. Then, we’ll get some inflation chatter, some members will chime in all over the place, and then we’ll see. The market will again go up and down, and some folks will get laid off because we’ve moved into the dreaded highly priced stocks need to have profitable business models temporary phase of investing.

    Freak out how y’all see fit. See ya next meeting!!

  62. Depth Charge says:

    It doesn’t matter what the FED says, their piddly little 25 basis point hike will be all the market needs to keep partying. Then, the FED will come back in March with more fake tough talk and another piddly rate hike, and the market will keep partying, because real rates are actually negative when you factor in CPI.

    And then the FED will pause sometime mid year, and inflation and prices will remain high and the working class and poor will live in misery for years on end as they get slow-boiled like a frog in a pot. The FED is a sick joke at this point.

    • Mr. Market says:

      – Long term rates going higher in 2022 already was a VERY strong DEFLATIONARY force, inflation killer. Because it has made borrowing for a 30 year mortgage A LOT more expensive. No need for the FED to raise rates more than say 0.25%.
      – Mr. Market is already signaling that there will be a rate cut later this year. March (???), april (???), may (???), ……………

      • Wolf Richter says:

        Mr. Market,

        Make sure you check back with us here in March, April, and May to review with us the Fed’s rate cut that you’re so sure of.

        Make sure you understand that a rate “cut” is not the same as a rate “hike,” LOL

  63. Mr. Market says:

    – I want to make a bet with W. Richter. No, no money involved.
    – My bet is that the FED either 1)) is going to raise the entire “target range” by 0.25% (most likely, IMO) or 2)) leave the “target range” unchanged (less likely, IMO)
    – But one W. Richter thinks/bets the FED is going to raise the entire “target range” by at least 0.50% or more because of inflation still being very high (> 5%, 7%) here in the US.
    – The only thing the loser of this bet has to do is apologize to other for being wrong. Deal ???

    • Wolf Richter says:

      LOL. Read my article. Well, OK, to spare you the effort, here is what I said about the rate hike:

      I said nothing that indicates that I (me moi) think the Fed will raise 50 basis points on Wed. Nothing at all. I discussed exclusively what the markets expect (“widely expected”) and what the Fed heads have said.

      Here are the three paragraphs that you should have read before posting this BS:

      1. “It is widely expected that the Fed will hike by 25 basis points on Wednesday, bringing the upper end of the target range to 4.75%, far higher than projected a year ago. The dot plot released after the December meeting showed that a majority of the participants projected 75 basis points of hikes in 2023. This would be a 25-basis-point hike on Wednesday, one in March, and one in May. And then a pause for the rest of the year to see where inflation is going.”

      2. “There seems to be no consensus at the Fed about the upcoming rate hike. Some governors came out in support of a 25-basis-point hike, others said that for them a 50-basis point hike is also on the table. The meeting could end with some dissenting votes, whichever way it goes.”

      3. “The projections of 75 basis points in hikes this year and then a pause into 2024 will depend on inflation data showing “compelling” evidence, as the Fed keeps saying, that the core PCE price index, which is the reference index for the Fed, is heading back to 2%.”

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