Market Rates vs Interest Rates

Macro Perspectives: Wed 16 Feb 22

Producer prices for January were almost 10% higher than the year prior. This follows the report last week of a year-over-year rise in consumer prices of 7.5%.

Overnight we heard from China on producer prices (109.50 vs 100.30 a year ago). This number will represent the prices, in large part, we should expect to be paying for products in the months ahead.

These prices have been hovering around the highest levels in 26-years, and will likely continue running hot (at a double digit yoy rate), thanks to the broad strength in global commodities prices (i.e. input prices).

Here's a look at the chart ...

If this number continues to come  in hot, those that have been calling the peak in inflation will have to recalibrate - that includes some Fed officials.

On that note, as you can see in the chart below, the spread between market interest rates (market determined) and the Fed Funds rate (set by the Fed) continues to widen aggressively.

This chart reflects a Fed that's not only way behind, but at risk of losing control of the interest rate market. In that case, these market determined rates could soar, which could slam the brakes on the economy (not a good scenario).

The Fed has some work to do.

Not helping matters, Jay Powell has yet to be confirmed by Congress for his second term (which officially ended earlier this month). Until then, he's considered a temporary Fed Chair. This is not projecting stability, for an interest rate market that is already on shaky footing.