GDP grew by a solid 10.64% for the 12 months ended March ’22 but that is in nominal terms.
GDP for the quarter slowed to 1.58%, while real GDP fell to -0.36%. Not only is growth slowing but inflation is taking a bigger bite.
The implicit price deflator climbed to 1.94% for the quarter — almost 8.0% when annualized.
Growth is expected to decline further as long-term interest rates rise.
Conventional monetary policy would be for the Fed to hike the funds rate (gray below) above CPI (red). But, with CPI at 8.56% for the 12 months to March and FFR at 0.20%, the Fed may be tempted to try unconventional methods to ease inflationary pressures.
That includes shrinking its $9 trillion balance sheet (QT).
During the pandemic, the Fed purchased almost $5 trillion of securities. The resulting shortage of Treasuries and mortgage-backed securities (MBS) caused long-terms yields to fall and a migration of investors to equities in search of yield.
The Fed is expected to commence QT in May at the rate of $95 billion per month — $60 billion in Treasuries and $35 billion in MBS — after a phase-in over the first three months. Long-term Treasury yields are likely to rise even faster, accompanied by a reverse flow from equities into bonds.
S&P 500 breach of support at 4200, signaling a bear market, would anticipate this.
Conclusion
Fed rate hikes combined with QT are expected to drive long-term interest rates higher and cause an outflow from equities into bonds.
A bear market (Winter) is coming.
