The Fed’s position, in one picture

The Fed Funds rate has caught up to the 3 month T-bill yield, but the 2 year yield lurks above

You can see that the Fed closed the gap as demanded by the 3 month T-bill today (blue extension is my artwork). You can also see that the 2 year Treasury yield is higher than the last high in 2018, quite possibly ending the bond bull market.

Finally, you can also see exactly why Powell jawboned another big hike to come. He knows he has to catch up to the 2yr, and hopefully not over-shoot it as previous Fed policy has done, ending stock bull markets in 2000 and 2007. So if the 2yr does not come down of its own – and market forces’ – accord, then there’s another big policy move coming.

The Fed cannot and will not go down without a fight about inflation because inflation will end the Fed’s regime of ‘inflation on demand’ if it gets (more) out of control. You see? The Fed has needed periodic deflation scares in order to inflate. What a screwed up system. They are literally being dragged into this fight that they cannot avoid.

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