By this time next week, we will have heard from the Fed as they announce the next rate hike on September 21st. It will be big too. Just how big is a matter of debate. 0.75% is a safe starting point, but 1.00% will be on the table as well. The former would match July’s hike–the biggest since 1994. A 1.00% hike hasn’t been seen since 1982. Desperate times call for desperate measures, and the Fed is desperate to push back against the highest inflation in decades. The Consumer Price Index (CPI) is the oldest and most widely-followed measure of overall inflation in the US. The Fed targets an inflation rate of 2.0% at the core level (orange line above). That mission was going about as well as it had ever gone for most of the past 2 decades until covid. For a variety of reasons, the Fed dragged its feet a bit in responding to post-covid inflation threat and has since been scrambling to catch up. That “scramble” is evident across financial markets. The typical reaction for stocks and bonds alike is to SELL SELL SELL when the Fed sends unfriendly messages. When traders sell bonds, rates rise. Stocks obviously move lower when sellers are in control. The net effect looks like this: What are the “unfriendly messages” and the “shift in the Fed policy outlook” specifically? Back in January, the big wake-up call was the Fed’s clear communication that its rate hike timeline would play out much more quickly than it did during the 2013-2018 tightening cycle. As Fed speakers made that increasingly clear via speeches and official policy communications, stocks and bonds continued to freak out.