The US Federal Open Market Committee (the Fed) just concluded their two-day meeting and, as expected, raised the Fed Funds overnight bank lending rate by 0.25% (25bps or basis points) to set the upper band at 1.25%.
No real surprise in their move just now at 2pm. What is a surprise, is the Citigroup Economic Surprise Index. I wrote about this last week here (highrockcapital.ca/pauls-blog/what-happens-when-an-economist-is-wrong-on-their-predictions). The surprise is the fact that Wall St economists have been predicting a stronger set of economic numbers since Mar/17 than have actually been reported...hence the surprise has been to a lower Index and a weaker economy.
Yet the Fed is raising rates into this weakening economy. And usually when the economy weakens, inflation (and inflation expectations) weakens too. In fact, that is happening right now (just this morning, in fact, with a lower print on US CPI) with recent inflation metrics being reported sequentially weaker and weaker than economist's expectations.
And the bond market is certainly speaking it's mind with rates in the longer end of the curve moving lower (higher prices) which is foreshadowing the fact that the Fed is making a policy error by hiking too soon. And the yield curve (the spread between short bonds like 2yrs and long bonds like 30yrs) continues to flatten, further signalling a policy error.
And finally, stocks. New highs. Why not?
Weaker economy, higher short term cost of funds, lower inflation/growth = higher stocks. Make sense? You're not alone.
In chart format:
Also note how US 10yr bond yields are hitting new lows for the move and have retraced about 62% of the Trump move to higher yields on the back of growth and reduced regulation prospects.
It is becoming more likely that the Fed is hiking rates right into a recession.