In the case of the Federal Funds Rate vs consumer price inflation the most important takeaway is that the correlation today is much weaker than it was during the Volcker Era.
Why exactly that is the case is more analysis than I have had the chance to complete, but the weaker correlation today suggests that the Fed--and, by extension, the media and thus most everyone else, including Wall Street--overestimates the strength of interest rate rises in combating inflation. Certainly the rate hikes have not had immediate impact--the Fed has been raising rates since March and July is the first month with a significant decline in headline consumer price inflation; up to that point the CPI was just shrugging off rate hikes.
Thus on the one hand the Fed has little choice but to keep raising rates--at the very least until rates can get above inflation--yet on the other the rate rises themselves are not likely to be what brings inflation down. Certainly rate hikes are not having much impact on labor in this country, depending on how much credibility you assign to the July Employment Situation Report.
Wall Street and Washington are both looking to the Fed and their rate hikes to cure inflation. They're likely to get the rate hikes, but not likely to get the inflation cure. That is going to make for a very complex reality indeed!
I was especially interested in your chart of CPI vs Fed Funds rate because I had done a similar comparison of the US dollar versus gold.
Many suspect that a higher dollar means a lower gold price, in other words, an inverse relation, but, as in your chart, no obvious correlation.
Reality is complex.
Reality is complex.
In the case of the Federal Funds Rate vs consumer price inflation the most important takeaway is that the correlation today is much weaker than it was during the Volcker Era.
Why exactly that is the case is more analysis than I have had the chance to complete, but the weaker correlation today suggests that the Fed--and, by extension, the media and thus most everyone else, including Wall Street--overestimates the strength of interest rate rises in combating inflation. Certainly the rate hikes have not had immediate impact--the Fed has been raising rates since March and July is the first month with a significant decline in headline consumer price inflation; up to that point the CPI was just shrugging off rate hikes.
Thus on the one hand the Fed has little choice but to keep raising rates--at the very least until rates can get above inflation--yet on the other the rate rises themselves are not likely to be what brings inflation down. Certainly rate hikes are not having much impact on labor in this country, depending on how much credibility you assign to the July Employment Situation Report.
Wall Street and Washington are both looking to the Fed and their rate hikes to cure inflation. They're likely to get the rate hikes, but not likely to get the inflation cure. That is going to make for a very complex reality indeed!