On 03/22/23 the FOMC will make their next decision on interest rates. They could continue to raise rates or pause because of recent U.S. bank failures. Either decision could ultimately be bearish for U.S. stocks and the economy.
Currently the U.S economy is experiencing higher than normal inflation rates caused by massive U.S. government spending. The huge liquidity increase was triggered by the Coronavirus pandemic 2020 – 2022.
During the late 1960’s the U.S government massively increased spending because of the Vietnam war and expanded social programs. The increased spending led to higher inflation and interest rates. An examination of that prior inflationary period can give us clues to what may happen in the coming years.
The chart courtesy of Macrotrends shows yearly U.S. inflation rates from 1965 to 2023.
The prior high inflation era lasted about thirteen – years! Note that there were periods when inflation rates decreased, yet subsequently inflation roared even higher. Ultimately the yearly inflation rate reached thirteen – percent! After the inflation Genie is out of the bottle its very difficult to put it back into the bottle.
The yearly Ten – Year U.S. Treasury Note yield (TNX) chart courtesy of Trading View illustrates its history since 1963.
While over the past two years there’s been a sharp rise in interest- yields/rates, the recent top was just below the low point of yields in 1967! In the late 1960’s yields/rates were rising because of higher inflation rates. In 1967 yields were in the early part of a multi-year rise. By the time TNX reached its ultimate peak it had more than tripled its 1967 low.
Currently, whatever happens in the short-term, U.S. interest rates/yields are likely to climb higher.
The monthly Dow Jones Industrial Average (DJI) and TNX chart illustrates their relationship from 1964 to 1982.
For more than a decade the DJI was in a sideways channel. Note that after the DJI initial peak just below 1,000 there were four subsequent attempts to significantly break above 1,000 – all of which failed.
The recent U.S. bank failures are an additional problem for the FOMC. There’s speculation that they could pause the rate increases to aid the banking system. If they pause it could trigger a multi-week rally for U.S. stocks and the DJI may make a marginal new all-time high. If there’s a rally it could be terminal – followed by a large drop in U.S. stocks.
If the FOMC raises rates it could be a great disappointment and trigger a sharp decline in stocks.
In 2023 the FOMC could be very limited in what they can do to avoid a severe economic downturn. Any easing of interest rate increases could ultimately make inflation much worse.
The FOMC interest rate decision on 03/22/23 could be its most important in several years.