Stocks Are Sinking and Rates Are Rising. It’s Painful, But We’re Heading for Normal.

Stocks and bonds are tumbling. Housing has weakened. And I haven’t heard a word about nonfungible cartoon monkey tokens in maybe three months. Strategists are now turning to truly bizarre assets—two I spoke with this past week recommended purchasing long-term Treasurys. One also said to favor shares of companies that generate cash, and he wasn’t talking about Bitcoin mining.

I don’t want to set off a panic, but financial markets appear to be careening toward normal. If left unchecked, ordinary assets could soon reach price levels that imply adequate long-term returns.
The Federal Reserve is raising interest rates at the fastest pace in four decades to squash the hottest inflation in just as long. Already, its target for short-term rates is up to just over 3% from closer to zero at the beginning of the year. How high will it go? Higher than inflation, surely, but the inflation rate a year from now matters more than the one for the past year. The Cleveland Fed bakes up a year-ahead inflation prediction using swaps, surveys, and bond data for ingredients. Its latest reading is 4.2%.

Or we can just watch the dots. Fifteen years ago, the Fed started publishing a quarterly chart deck of economic predictions, and 10 years ago, it added a dot plot showing where its individual participants think rates are headed. The dots are “assessments of appropriate monetary policy,” not predictions, the Fed likes to say. Good to know. The dots just shifted higher. The new midpoint prediction—I mean assessment—is that the fed-funds target will reach 4.5% to 4.75% by the end of next year.

The dots sent Wall Street into a fresh tizzy this past week. But really, they say we’re moving toward normal, not away from it. The average monthly fed-funds rate in data going back to 1954 is 4.6%. Mortgage rates are turning more ordinary, too. The 30-year fixed rate recently spiked to 6.3%, versus 2.9% a year ago. But the average in data going back to 1971 is 7.8%.

What matters for investors is whether measures like these will shoot above long-term averages, and how…


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