Fed's Catch-22
A Catch-22 is a problem for which the only solution is denied by a circumstance inherent in the problem or by a rule. This is exactly the problem the Federal Reserve faces.
The last time that investment grade corporate bond prices fell below their monthly EMA ribbon support was in March 2020, when the Fed made emergency purchases of corporate bond ETFs to ensure liquidity. Now the bond prices are falling below their monthly EMA ribbon support and the Fed is taking the exact opposite measure by calling for accelerated rate hikes.
Is it possible to avoid a recession at this point? Only time will tell but the charts seem to doubt it.
- Historic inflation continues to accelerate, becoming embedded into the market's expectations and risking a spiral effect
- In order to stop rapid inflation, and achieve its mandate of price stability, the Fed must raise interest rates as rapidly as inflation is rising.
- The Fed cannot raise interest rates as rapidly as would be needed to slow rapid inflation because it would rapidly begin to freeze liquidity in the corporate bond market.
- Rapid tightening would spillover to corporate earnings, asset prices, consumer borrowing and spending, economic growth and ultimately employment, countering the Fed's mandate of maintaining stable employment.
The last time that investment grade corporate bond prices fell below their monthly EMA ribbon support was in March 2020, when the Fed made emergency purchases of corporate bond ETFs to ensure liquidity. Now the bond prices are falling below their monthly EMA ribbon support and the Fed is taking the exact opposite measure by calling for accelerated rate hikes.
Is it possible to avoid a recession at this point? Only time will tell but the charts seem to doubt it.
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