“Remember: upon the conduct of each, depends the fate of all.” -Alexander the Great
While conquering Asia Minor (modern day Turkey), Alexander the Great entered a city where a knot of immense complexity had been tied in front of a temple. The prophecy, of course, was that whoever untied the knot would rule the world. The knot was so convoluted, so dense, so self-reinforcing that it was impossible to untie on its own terms. So, Alexander created new terms, external to the game that he was told to play – he cut the knot with his sword.
Our modern-day Gordian Knot has been the confounding persistence of inflation. Despite the most rapid rate hiking cycle in over 40 years, whereby the Federal Reserve raised rates by 550 basis points over 18 months, inflation has begun to reaccelerate. Energy has been the primary culprit with oil prices jumping nearly 30% and natural gas prices 13% since June. With the promise of price stability beginning to fade, the Federal Reserve is creating new terms to address the tightly wound knot – ushering in a higher-for-longer interest rate regime. With current policy rates at 22-year highs, it remains to be seen whether the Fed will be able to loosen the knot without severing the string.
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Michael J. Aroesty