Inflation’s Back at the Top of the Chart. The Fed Just Got the Memo.

According to CNBC, S&P Global’s overall inflation measure hit its highest level since October 2022, and markets are now pricing in a Fed rate hike at the October meeting, following remarks from Fed Governor Barr that signaled the central bank is not done tightening.

The number that matters here: the federal funds rate currently sits at 3.75%-4.0%, and inflation is running at one of its hottest readings in years. That gap is razor thin. When the policy rate and the inflation rate are nearly the same, monetary policy is barely restrictive in real terms. The Fed has to keep moving just to maintain pressure, let alone add it.

This is where the economy’s own dashboard starts flashing mixed signals. Growth is sitting near its historical midpoint with low recession risk. Credit spreads are historically tight, meaning the bond market is not pricing in stress. The VIX is subdued. By most conventional reads, the financial system looks calm. Yet inflation sits higher than roughly nine of every ten months on record, and consumer sentiment remains historically weak. That combination is unusual and worth watching closely: consumers feel the squeeze even when credit markets don’t.

The sector rotation picture adds texture. Technology and communication services have been leading the market while defensive sectors like utilities and real estate lag badly. Historically, when investors rotate away from rate-sensitive sectors like real estate and utilities, it often reflects a market adjusting to the idea that rates will stay higher for longer. The market appears to be doing exactly that repricing in real time.

Historically, investors and business operators have watched the gap between the policy rate and inflation closely as a guide to real borrowing costs and capital allocation decisions. When that gap is narrow, cheap money is effectively still cheap in inflation-adjusted terms, which keeps incentives for risk-taking alive even as the headline rate climbs.

Bottom Line: Inflation at a multi-year high with rates barely above it means the Fed’s work is far from over, and anyone treating the current rate level as the ceiling may be getting that wrong.

Read more: CNBC Top News

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