Whisper it ... but is this the top?

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

World stocks posted their biggest fall in more than three weeks and the dollar rose on Thursday, as surprisingly strong U.S. growth figures cast doubt on how aggressive the Federal Reserve's interest rate-cutting cycle will be.  

In my column today I look at the reasons why the Fed may one day consider replacing its current 2% inflation target with an inflation range. Atlanta Fed President Raphael Bostic likes the idea. Will other Fed officials be so keen? 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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* Back and froth

Investors calling the bursting of the AI/tech bubble and the equity market top in recent months have been burned badly. And often. So why should this current wobble be any different? 

There may be no obvious reason or catalyst. The risks are well-known by now - stretched valuations, positioning, concentration, and faith in AI's productivity-enhancing powers. And the Fed is cutting rates now, so that's more fuel for the rally, right? Perhaps. Or perhaps it marks the contrarian top.

* Crypto blues

After rebounding some 65% from its April lows, Bitcoin seems to have hit a ceiling. The world's biggest cryptocurrency has mostly flatlined over the last three months, a period in which it has reached its record high around $124,000. 

Its underperformance against gold, tech and stocks more broadly is beginning to deepen, especially in the last month - down 7% in that period versus gold's 11% rise. Rising Treasury yields putting fiat dollar in a more attractive light too. 

* Debt ceiling? What debt ceiling?

Global debt stands at a record high of $337.7 trillion, an Institute of International Finance report on Thursday showed, driven by easing global financial conditions, a weaker dollar and accommodative policy from major central banks. Global debt has risen $21 trillion in the first half of the year.

These are big numbers, but should we be worried? It's something to keep an eye on, of course, but as world growth and activity rises so should borrowing. And as a share of GDP, debt actually fell again, to a five-year low. Also, one man's debt is another man's asset, right?

There's little prospect of the Federal Reserve changing its 2% inflation target right now. But the composition of the Fed's board is changing and Jerome Powell's term as Fed Chair expires in May, so could discussions about an alternative to the fixed 2% target soon begin to percolate?

Figures on Friday are expected to show that U.S. inflation in August exceeded the Fed's 2% goal for the 54th month in a row. Even accounting for all the shocks of recent years and inbuilt flexibility in the Fed's post-COVID inflation framework, that's a long time for a central bank to miss its target.

And there's every likelihood that inflation won't get back to 2% for several more months, probably years. Fed officials' median projections don't expect headline or core PCE inflation to get back to 2% until 2028. 

Even that timeline could prove to be tough. The Fed has a dual mandate, and rising risks to the employment side of it have prompted the central bank to resume its interest rate-cutting cycle. But financial conditions are the loosest in years and growth is still humming along at a decent clip, so rate cuts now could stoke price pressures further.

The Fed failing to meet its inflation target is hardly new.  But the longer inflation stays above target, the more likely it is that credibility in the target and the Fed's policymaking more broadly could erode. 

That may encourage the Fed to rethink the target altogether.

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