There is an interesting narrative being laid out regarding inflation and rates: traditionally, it’s generally accepted that low rates stimulate consumption and high rates restrict it. However, due to the fact that the top 50% percent of the U.S. population are reposnible for the majority of dollar consumption, and as you can see below they own 99% of interest bearing assets such as Municipal bonds (see chart below), the new argument defends the thesis that lowering official rates will lower the interests earned by the top 50% in their investments and therefore will have less money to spend, which will restrict demand and lower inflation. Although counterintuitive, it makes sense and Wall Street will find any way to get the rate cuts they desperately want and need. The big question is if a data-dependent, model-driven Fed will buy the argument.
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Chart source: Bianco Research.
