The Longest 8th Inning in the History of Baseball

Back on June 1, 2005, Dallas Fed President Richard Fisher told CNBC:

“We are clearly in an 8th inning of a tightening cycle, and we have the ninth inning coming up at the end of June.”

The markets, which had already bounced off of their May lows, gathered themselves together over the next few days, and then made a new leg up. Many people credited that move to Fisher. It only was halted by the late August hurricanes in the Gulf, and the destruction of New Orleans. During the first week of this year, we again had “lift off,” similarly premised on the idea that the Fed tightening cycle was just about over.

This leads me to a question:

How much of the rallies during the past 12 months have been based, at least in part, upon the false premise that the Fed is nearly through tightening?

Long time readers of mine know that I believe markets rarely move in a this happened, so markets did that basis. The complex choreography of capital markets are far more intricate than many folks realize, hardly as efficient as most academics believe, and may be far more attuned to the rules of chaos than those of pure randomness.

Is the Fed “just about done?”  Given the recent jawboning from various Fed officials, I believe that is a premature declaration. Last week, Chicago Federal Reserve Bank President Moskow suggested that rates are “historically low,” that inflation was “creeping into the core” CPI rate. Further, he spooked the markets when he suggested that rates may need to “rise further beyond neutral” to kill inflation.

The consensus is evolving amongst various Fed officials that erring on the side of over-tightening is much preferred to letting inflation accelerate. New Fed head Bernanke may even “brush aside lawmakers’ calls for a pause” and “vow vigilance against inflation.”

Indeed, in a hardly noticed announcement, the FOMC changed the previously planned upcoming FOMC one day meeting into a two day affair. I hardly think the extra time is to welcome helicopter Ben to his new gig. Rather, it is more likely to discuss the increasing signs of inflation of the commodity, wage, and fiscal flavors. (Note, however, that I do not believe there is wage inflation).

It is my suspicion that more than a little of the Bullish optimism we have seen over the past 6 months has been incorrectly attributed to the Fed tightening cycle ending. Even more ironically, this regardless of the data showing that markets tend to slide when tightening cycles end.

To borrow from Dallas Fed President Richard Fisher’s analogy:

it looks like we are about to go into extra innings against inflation – again.

What's been said:

Discussions found on the web:
  1. Roger Nusbaum commented on Feb 15

    It seems like inflation only exists in energy, healthcare and education (that’s me agreeing with what Barry has been saying all along) and almost non-existent elsewhere?

    From a growth standpoint, what will the Jan hike and the next hike do next fall when they are fully felt?

    This is the conundrum, IMO.

  2. Chad K commented on Feb 15

    If inflation is coming primarily from oil… and thus filtering into things like food, etc… it seems like raising rates isn’t going to solve the problem so much as decreasing demand for oil… I’m pretty sure they teach supply and demand in 4th grade now… but maybe back in the “old days” it was seen as crazy, like the earth being round… and not the center of the solar system.

    If they want to stop inflation, here’s an idea… raise rates another quarter point (or half)… but force all monies collected from it to go into some sort of program to decrease demand for the real reason for any current inflation.

    On a side note, I’m happy to see GM pushing all of this E85 capable engine stuff in commercials… but until we have a thriving (sanely priced) sugar market… E85 will not be the great benefit the commercial pushes. But, like Bob says… Baby Steps.

  3. DJ commented on Feb 15

    There is extensive inflation in assets right now, particularly in bonds and real estate. That is countered by virtually non-existent consumer core inflation. But, the problem the Fed is having is their mechanism of changing short-term rates bleeds money from the consumer (through the prime rate) but doesn’t push up long-term rates for bond investors. This conundrum can only be properly addressed through fiscal policy.

  4. Barry Ritholtz commented on Feb 15

    There no inflation, except a few items:

    Industrial metals
    Construction materials
    Insurance costs
    Precious metals
    raw materials (wood, pulp, etc)
    Medical care
    Lodging (hotels)

    Note that wages are not on the list . . .

  5. Anonymous commented on Feb 15

    Gee Barry, it sounds like there’s inflation in just about anything not manufactured in Asia… imagine that.

    I wonder what will happen when we start getting inflation in Asian products?

  6. d commented on Feb 15

    slosh…slosh….slosh….. There has to be a drain around here somewhere….

  7. Dennis commented on Feb 15

    It looks as though the rate hikes will go into extra innings!

  8. Abhay commented on Feb 17

    Cubs fan have another 8th inning in mind.

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