Powell Got One Thing Right, “high interest rates … will bring pain”

Bonds, currencies, stocks, and precious metals will all see exceptionally high volatility as a result of the recent string of very significant rate rises.

Correlation between Bond Yields, Rate Increases, and Inflation

The September CPI inflation data, which was published by the BLS yesterday, revealed a 0.4% rise in inflation for the month of September. According to the data, the CPI inflation index decreased by 0.1% from the previous month's year-over-year of 8.3% to 8.2% in September. The core CPI, however, attracted the most interest. September saw an increase in the core CPI from 6.3% YoY in August to 6.6% YoY.

The temporal lag between interest rate increases and actual inflation is inherent, and the Federal Reserve prefers to base its monetary policy on the core level of inflation. In spite of this, a rise in core inflation after the Federal Reserve aggressively increased interest rates from near zero to between 300 and 325 basis points over the course of the last five consecutive FOMC meetings this year—including three consecutive rate hikes of 75 basis points each in June, July, and September—clearly indicates that the recent rate hikes are having a nominal effect on reducing inflation.

However, they have significantly impacted the United States' growing debt instrument yields. After accounting for today's 1.68% rise, the 10-year Treasury note yield has now above 4% and is sitting at 4.02%. Thirty-year U.S. bond yields are not far behind, at 3.997%.