As the Federal Reserve puts a hold on interest rates, investors have to ask themselves whether the elevated inflation rate is also on hold.
The Fed’s preferred measure of so-called “core” inflation, which excludes food and energy costs, most recently came in at 3.7%. Despite having fallen substantially since last year’s peak, the official inflation rate has yet to approach the Fed’s 2% target. The Fed cannot credibly declare victory over inflation. But central bankers also cannot tighten further without risking severe damage to financial markets and the economy.
Long- term bond yields are finally dropping, though they remain sharply higher than they were two years ago when Treasuries yielded less than 2%. Last month, yields across many durations hit their highest levels since 2007. Back then, government debt was 60% of gross domestic product. Today it’s over 100%. The Treasury Department will issue a staggering $776 billion in debt in the fourth quarter alone.
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