The CPI numbers came in for September 2022 showing an increase of 0.4%, which was slightly higher than expected.  The year-over-year now stands at 8.2%.

The less volatile median CPI came in at 0.7%.  The year-over-year median CPI just hit a high of 7%.

Stocks originally tanked on the news in the morning, but then quickly recovered and rocketed much higher.  The overall swing was quite dramatic, and it is a little puzzling.

With this CPI reading, it is evident that the Fed will continue to raise its target federal funds rate this year, and the balance sheet will continue its slow decline.

This is in the face of an already somewhat inverted yield curve.

While the 10-year yield is still slightly higher than the 3-month yield, just about everything else has disaster written all over it.

The 6-month yield exceeds the 30-year yield.  So an investor is willing to take a lower yield locked in for 30 years than for 6 months.  This means that bond investors are not expecting price inflation to remain elevated in the long run.  It also means that bond investors are expecting a recession in the near term.

The problem for the Fed is that it can’t worry about a recession too much because it is more worried about the dollar.

We All Eat

Price inflation doesn’t hit everyone equally.  It tends to favor debtors, but only to a point.  It needs to be fixed-rate debt.  It tends to favor those with hard assets.  It tends to hurt those on a fixed income.

It is also complicated because everyone has different expenses.  They buy different things.  One thing that everyone consumes is food.  The price of food continues to go higher.  It is generally outpacing the overall price inflation rate.  It is hurting nearly everyone.

This is why the upcoming election shouldn’t go well for those in power (among other reasons).  The amazing thing is that Congress continues to spend recklessly, perhaps as bad as ever, while the Fed is currently saying “no” to buying government debt.

While the Fed and the politicians in DC do tend to work hand-in-hand, there may be a small element of truth when it comes to the notion of Fed independence.  I don’t think the central bank wants to destroy the dollar.  They don’t want to destroy their own power.

I think the Fed will keep tightening until price inflation really is under control.  There are a few exceptions though.  The only things that could derail the Fed’s tightening are major trouble in the bond market and trouble with major financial institutions.

I think the Fed always stands ready to bail out the major banks and to make sure there is no serious talk of default on U.S. government debt (unless it is defaulting only on Russia).

I keep saying that a major drop in the stock market isn’t going to make the Fed reverse course.  We’ve had major drops before.  The Fed is definitely more concerned about getting price inflation under control than the price of stocks.

The Fed Has Some Control, But There Are Choices

While central planning a major economy doesn’t work for the people it is being planned on, the central bank does have tools to control things.

I recently wrote about Ben Bernanke, and how he correctly stated that the central bank has a digital printing press and is always capable of creating “positive inflation”.  This has been made evident the last couple of years.

The Fed can almost always control things the other way.  Unless total faith in the dollar is lost, the Fed can always bring price inflation down.  The Fed could vote tomorrow to raise its target rate by 300 basis points and to sell off $1 trillion in Treasury bills.

That would bring price inflation down really quick.  It would also crash the stock market and the entire economy.  It would really disrupt the bond market.  So the Fed doesn’t want to do anything that dramatic, but it certainly could if bringing down inflation was the only goal.

The Fed is trying to bring down price inflation in a controlled manner.  That is what we should expect.  But there is no escaping the malinvestment that has occurred over the last 14 years when Ben Bernanke started the Fed on an unprecedented monetary inflation run.

The Fed has choices.  They may not be good choices, but there are choices.  Right now, I think there is more of an emphasis on reducing price inflation.  The Fed members don’t care if the Democrats get wiped out of office.  They might care if it was Trump running for president, but even some establishment people probably prefer the Republicans to take over Congress now.

Again, expect the Fed to keep tightening until price inflation comes down significantly.  They will put up with a declining stock market.  They will put up with a recession.  They just don’t want a completely chaotic bond market, and they don’t want major banks defaulting.  Those are the only two things that will change Fed policy until price inflation comes down.