There will be a change to how my daily and weekend pieces are published quite soon. I'll have the details in the near future.
We caught a portion of an interview this morning with the President of the World Bank, David Malpass. In it, he touched on the thought that the Fed wants to get interest rates back to “neutral.” The line of questioning that followed missed the point. Mr. Malpass was telling them that the Fed needs to get asset prices back in-line with their underlying fundamentals. He talked about how interest rates around the globe have been…and still are…extremely low. However, the line of questioning continued to focus only on inflation…and how higher interest rates would hurt the economy.
In other words, in his answers, Malpass was saying the same thing we’ve been saying for some time now: The Fed’s goal is not just to tame inflation, it’s ALSO to get interest rates (and thus other asset classes) back to a “neutral” level…one where they can trade on their own!
The divergence between what the leading narrative is on Wall Street today…and what the real situation is right now…is creating a situation where too many investors are focused too much on the issue of inflation. Don’t get us wrong, the issue of inflation IS a VERY important one. If inflation is not tamed, it will create a lot more weakness in the economy than we’ve already seen. However, the Fed was ALWAYS going to tighten policy…whether inflation became a problem or not! They HAD to get the financial system off of the steroids that their zero interest rate policy and their massive QE program had provided.
Therefore, asset prices were always going to have to come back down from levels that could only exist with artificial steroids (zero ...