Will the Fed Ignore the Economy to Fight Inflation?

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The Federal Reserve, bond markets, and economic cycles have been dancing in a well-choreographed fashion for the last 30 years.

But this age-old trio has a new dance partner. After patiently watching from the sidelines, inflation is flashing her moves. The once-predictable partners are falling out of rhythm.

With inflation running at four times the Fed’s 2% objective, the Fed is anxious to reign it in. However, the bond market and economy are warning the Fed to be careful. Will the Fed be lured to ignore the economy and markets in its quest to tame inflation?

In this piece, I explore the dance trio and inflation. The goal is to appreciate better how the Fed may conduct monetary policy in the months ahead. Will it aggressively hike interest rates while the yield curve flashes recession warnings? How will inflation and the economy react if it does raise rates? Lastly, what should we expect from stocks if the Fed opts to fight inflation instead of protecting the market?