The first quarter of 2022 saw no abatement in soaring inflation whether one focused on the Producer Price Index ("PPI") or the Consumer Price Index ("CPI"). This sent financial professionals delving into the 1970s and the 1940s looking for similar regimes and hints of potential outcomes. The global commodity chain, already under pressure from COVID disruptions and years of underinvestment, was thrown into near disarray when Russia invaded Ukraine. Both countries are critical exporters of agricultural products and Russia is one of the world's top energy producers.
The Federal Reserve ("Fed") raised the Federal Funds target by 25 basis point ("bps"), the first increase since 2018. Governors are now messaging a far more hawkish tone, promising a series of rate hikes and a potentially aggressive runoff of the balance sheet (Quantitative Tightening). This of course begs several questions. How far will the Fed actually go? Will they relent if the economy slows? Will they pause if there is a rapid depreciation of financial assets? Will they go too far, committing financial exsanguination and a deep recession? With estimates for 1st quarter GDP hovering in the 2% or lower range, year-over-year ("YoY") CPI estimates near 8%, and a sampling of price changes not indicating much relief either YoY or compared to pre-covid levels, something of a stagflationary cycle seems to be developing. In our view, this creates a treacherous environment to be tightening financial conditions and is somewhat of a death-defying tightrope act for the Fed.