“We’ve never broken inflation without this happening…”

This became the rallying cry for bears over the past year.

Inflation was the problem. And history pointed to a solution. But it was a painful one…

Interest rates had to go up. And they had to go up a lot. That’s because high inflation had never come down until the federal-funds rate was higher than the inflation rate.

This time last year, the fed-funds rate was at 0%… But inflation was over 7%.

That meant a lot of pain was on the way for investors. And it meant dramatically higher rates would force a “reset” on Wall Street.

Things have changed since then, of course. But not as much as you might hope…

Interest rates are still well below the inflation rate. So by following this line of thinking, you might expect plenty more rate hikes from here.

But as I’ll show you today… that line of thinking is dead wrong.

In fact, if you look at it with the right measure, the Federal Reserve has basically done its job. And it means the rate hikes that beat up the market in 2022 could already be a thing of the past.

Let me explain…

Yesterday, I explained the current trajectory of inflation. It has been heading lower – and fast – for the past six months.

If that trend continues, the Fed won’t have to hike rates much from here. In my view, one more rate hike is the likely outcome. And there’s actually an even more bullish possibility…

One measure tells us we might see zero rate hikes this year.

This measure is the “proxy funds rate” from the Federal Reserve Bank of San Francisco. And in short, it accounts for quantitative easing and quantitative tightening…

If the Fed is buying bonds, that’s additional easing. That means money is looser than the effective fed-funds rate shows. And if the Fed is selling down its balance sheet – like it is right now – it means money is tighter than the effective rate shows.

Here’s the proxy rate versus the effective fed-funds rate since quantitative easing began in 2009…

You can see that interest rates were set near zero after the global financial crisis. But because the Fed was buying bonds, the proxy rate was actually negative.

Today, the proxy rate is much higher than the effective rate of 4.25%. That’s because the Fed has sold down its balance sheet by roughly half a trillion dollars since last April.

The proxy rate is over 6% right now. That’s darn close to the seasonally adjusted inflation rate of 6.4% for December.

The Fed knows this. So given the high proxy rate and the fact that inflation growth is slowing down… the central bank’s rate hikes could be over.

We won’t have to wait long to find out if that’s correct. The Fed is set to announce its next move for interest rates later today. But even if it does hike rates, the financial world of last year is changing.

Note from DTA: On Wednesday, the Federal Reserve raised the benchmark interest rate by a quarter point.

The possibility that rate hikes are nearly done is the most important financial shift of 2023…

Higher interest rates were truly the only thing that mattered for investors last year. But the seemingly endless hikes have either already found an end or will very soon.

That’s reason enough to be optimistic for the rest of the year.

So if you’ve been waiting to put money to work, the time is now.

Good investing,

Brett Eversole

Strange change at your bank [sponsor]
At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.

Source: Daily Wealth