9. Ep. #9: Red Hot Inflation is Cooking the Economy

Home » 9. Ep. #9: Red Hot Inflation is Cooking the Economy


The June CPI data came in red hot on Wednesday. The Consumer Price Index, a measure of inflation, reported an increase of 9.1%, the highest reading in 41-years.

As a result the Fed is likely to raise their benchmark Fed Funds Rate by 100 basis point (1%) when the FOMC meets July 26-27.

However, the CPI is a lagging indicator and according to forward looking data it appears the Fed will be aggressively hiking into a recession, which will likely deepen the recession and exacerbate its impact.

The market has been sniffing out the likely policy error and in anticipation has push interest rates on long duration bonds lower than short duration bonds; a phenomenon known as an “inverted yield curve”.

The most watching yield curve is between the 2-year bond and the 10-year bond, which ended the week 20 basis points (0.20%) inverted, the deepest inversion since the start of the century, even after the near record high inflation data.

Normally, high inflation is bad for bonds, but investors are running for the safety of cash-flow. As a result mortgage rates also declined, as the price of mortgage bonds rallied alongside US Treasuries.

Will this drop in mortgage rates continue, and will it be enough to keep housing from crashing along with the rest of the economy?


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