If you’re wondering whether the nascent bull market in US equities risks making the Fed’s job more difficult (again), the answer is most assuredly “Yes.”

Generally speaking, officials are clinging to the idea that the world hasn’t changed. That even if a few structural disinflationary enablers disappeared in the 2020s, we haven’t transitioned to an entirely new macro regime characterized by persistently hot nominal growth, continual upward pressure on wages and, critically, unrelenting demands of fiscal policy tied to socioeconomic shifts and higher military spending.

If central bankers are wrong and we really aren’t in Kansas anymore, then r-star is probably higher. But thanks to decades of tyranny by acronym (ZIRP, NIRP and LSAP), ironically in the service of reinvigorating nominal growth and inflation, r-double-star is almost surely lower, which means balancing the economy could entail triggering financial crises (plural).

Where does America’s infant bull market come in? Well, simple: If stocks keep running, rekindling the vaunted “wealth effect,” it’ll be even harder for the Fed to constrain demand, which in turn risks prolonging and perpetuating the hot nominal growth environment. To meet robust demand, businesses have to hire more workers, and labor remains in short supply.

Do note: The latest household wealth figures, released a few days ago, showed gains in equities during Q1 were more than four times larger than home equity losses during the period, which meant that despite a $617 billion decline in the value of real estate, US households nevertheless ended the quarter $3 trillion richer on paper.

It was the second consecutive quarter during which stocks more than made up for falling property values.

The most recent data we have on the national aggregates suggests home prices are rising again on a MoM basis, stocks are in a bull market and the American consumer never really folded in the first place. The implication is clear enough: If things keep going like they’re going, the Fed could have a problem on its hands by late summer, particularly when you consider that the super-core measure of inflation (i.e., services ex-housing) that Jerome Powell is watching for evidence of progress has shown no real signs of moderating.

On Monday, Nomura’s Charlie McElligott cautioned on all of this. “US nominal GDP running ~7%, the legacy ‘excess pandemic savings’ [and] a still-bloated Fed balance sheet override any meaningful policy tightening transmission into a real economy built upon the bedrock of an unrelentingly tight labor market [where] wage growth remain[s] at multi-decade highs,” he wrote, describing the conditions which could eventually compel the Fed to turn the screws further, if only with terse rhetoric.

“From a sequencing perspective, as this market rally and broad ‘positive wealth effect’ takes further hold, I believe it is then likely to increase the [odds of a] hypothetical where August’s Jackson Hole could again be utilized to reintroduce some two-way market risk, with the Fed forced to message hawkish,” Charlie went on. “All at the same time we’ve seen such an asymmetric long positioning rebuild, and with ‘base vol’ at very low levels, meaning it wouldn’t take much of a vol move to create a substantial mechanical de-risking flow.”

That may seem a distant prospect, but time flies. If past is precedent, it’ll be late August in less than 10 weeks.