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1/4 Yesterday I posted the thread below arguing that the market is repricing an inflation shock, not a recession scare. 10-year yields are rising, bond volatility is exploding, inflation expectations are jumping, and Fed pricing has swung from cuts toward hikes. Follow up 🧵 2/4 The immediate pushback is familiar: this “supply shock” will hurt real growth, so the Fed should cut rates. This well-known economist has been making exactly that argument. https://t.co/mON9BBqWX2 3/4 That is only half the equation. A supply shock hurts growth, but it also raises inflation, so the real question is which side dominates. In 2022, inflation rose more than real growth fell: the blue CPI line and arrow moved sharply higher while the green real-GDP bars and arrow moved modestly lower. The bottom panel shows the Fed’s answer: hikes, not cuts, as the federal funds rate moved from near zero in early 2022 to above 4% by year-end 2022. Why? When inflation rises faster than growth falls, nominal growth (real GDP plus inflation) rises. If today’s oil shock does the same thing as 2022, the correct takeaway is not automatic cuts. It is possible that the Fed may have to stand pat or even consider hiking. 4/4 @greg_ip arrived at a similar conclusion yesterday. https://t.co/5OwznMvFH2