Why Inflation Can Still Go Higher | Summary and Q&A

TL;DR

The market is already pricing in future interest rate hikes and there is less uncertainty in the short-term, but more uncertainty in the long-term. Inflation could potentially reach higher levels than the current 7-8% range.

Key Insights

• ☠️ The market has already priced in future interest rate hikes, with a high probability of one rate hike at the upcoming March meeting.
• 🍉 Short-term interest rate predictions have less uncertainty, while long-term predictions have a wider distribution of expectations.
• 🙈 Inflation can potentially surpass the current 7-8% range, as seen in historical examples during global pandemics.
• ☠️ Monetary policy tightening may include accelerated rate hikes in the next 12 months to address market factors.
• 🎱 The 10-year and 30-year treasury yields are not the only indicators to consider; short-term rates like the three-month bill and six-month bill have also significantly increased.
• ☠️ The CME Fedwatch Tool provides insights into the market's expectations for future interest rate hikes.
• ❤️‍🩹 The highest inflation period in modern history occurred during the end of the Spanish Flu pandemic, reaching levels in the 20 range.

Transcript

[Applause] well the short answer is i think there's quite a bit priced in already um we've already pretty much thrown out the view that inflation is transitory at this point um the fed even admitted that that was the wrong word to use um and as far as interest rates go you'd be surprised how much is already being predicted um i want to show my shar... Read More

Questions & Answers

Q: What is the market pricing in for future interest rate hikes?

The market is already pricing in a high probability of one rate hike at the upcoming March meeting and multiple rate hikes by the May meeting. The CME Fedwatch Tool provides insights into the market's expectations for future interest rate hikes.

Q: Is there more uncertainty in short-term or long-term interest rate predictions?

There is less uncertainty in the short-term as the market has already priced in future interest rate hikes. However, as time goes on, there is more uncertainty and a wider distribution of expectations for interest rates in the long-term.

Q: Can inflation go higher than the current 7-8% range?

Yes, inflation can potentially reach higher levels than the current range. Historical examples, like the inflation caused by the Spanish Flu pandemic in 1918-1920, show that inflation can peak in the 20 range during global crises.

Q: How might monetary policy be tightened in the next 12 months?

There could be accelerated monetary policy tightening in the next 12 months, including potentially larger rate hikes. This is necessary to address the extraordinary factors present in the market and bring it back to stability.

Summary & Key Takeaways

• The market has already incorporated the expectation of future interest rate hikes, with a high likelihood of one rate hike at the upcoming March meeting and multiple rate hikes by the May meeting.

• There is more uncertainty as time goes on, with a wider distribution of expectations for interest rates in the long-term.

• Inflation could surpass the current 7-8% range, as historical examples show that inflation caused by a global pandemic can reach higher levels.