Interest Rates, Inflation and Economic Growth

Rapid expansions of the money supply most often result in inflationary conditions, and the post-Covid cycle of fiscal and monetary stimulus were no exception. The Fed’s rapid 500+ basis point increases in the Fed Funds Rate were the inevitable policy response to an overabundance of liquidity and an overheating of the cost of basic goods and services. As the Fed began to sense a slowing in the pace of late-2024 inflation, the FOMC attempted a series of gradual rate decreases in Q4 totaling 100 basis points, which would typically serve to reduce benchmark yields. Instead, in unprecedented fashion, the shape of the yield curve normalized and average yields increased 100 basis points. Is it that the Fed is cutting too early or too much, risking a return to inflation in the face of continued economic growth? Is 2% inflation an unrealistic target and the Fed should settle upon the market’s implication that 3% inflation is more reasonable? Or has the bond market decided that the U.S. has exceeded an appropriate debt level and now wants to be compensated for the added risk?

In late 2021, when we first placed inflation and interest rates on the same graph, they looked somewhat correlated other than timing and magnitude differences. Directionally, much was the same. This may not have corresponded to the gut feeling of many that low interest rates beget high inflation and high interest rates lead to low inflation. Until inflation shifted dramatically upward in 2021-2022, the broad trend since 1980’s peaks had simply been absolute percentages trending lower for longer for both interest rates and inflation.
 

For more information, download the full report.

© Northmarq Fund Management Research, February 2025. All Rights Reserved. Copying, selling or otherwise distributing copies and/or creating derivative works for commercial purposes is strictly prohibited. Although significant efforts have been used in preparing this guide, Northmarq and Northmarq Fund Management make no representation or warranties with respect to the accuracy and completeness of the contents. Northmarq and Northmarq Fund Management Research do not provide tax, legal, investment or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.