Over and over again, day after day, market observers of all kinds (myself included, although I try to avoid it) reference how “shocking” the last few years were from a macroeconomic perspective.

As I regularly remind readers, the “abnormal” macro volatility experienced so far in the 2020s is in fact just a return to the way things always were prior to an anomalous three-decade run of relative stability.

To call this a recurring theme in these pages would be to understate the case. But as with most things I repeat again and again, it’s a crucial point to grasp: There isn’t anything especially “normal” about stability, particularly not as it relates to macroeconomics.

The figure above, which I’ve used before, is the (very) long history of inflation in England. Maybe you want to argue that we now understand the “science” of economics well enough to smooth out cycles and wield monetary policy such that inflation can be managed in perpetuity around an arbitrary target but… well, economics isn’t a “science.”

I bring this up again not only because it’s important, but because, while sifting through what’s left of the year-ahead 2024 pieces I didn’t have to time read when they flooded in from mid-November to mid-December, I ran across a BofA derivatives outlook which addressed this issue directly and juxtaposed it with rate-cut pricing for 2024. That pricing is now much more extreme, which is to say the juxtaposition is now even more salient.

The scatterplot below, from the note, shows that CPI inflation in the US was typically a full percentage point above the Fed’s modern target over the last century and on considerably higher volatility.

“It’s the last several decades” that are anomalous, BofA wrote, editorializing around the light blue dots. “A return to that environment isn’t guaranteed.”

That’s potentially problematic at a time when the market is now priced for nearly seven rate cuts in 2024 on the assumption that the disinflation process is entrenched, and thereby won’t be easily dislodged should any black swans come splashing.

The figure below, from the same note, shows the market consistently underestimated the Fed’s willingness to lift rates during the hiking cycle, which raises a simple question: Is the market now overestimating the Fed’s willingness or, perhaps more aptly, capacity (in the context of inflation realities), to cut rates over the next 12 months?

“Another bout of policy path misestimation could create downside risk in an equity market that has so far been surprisingly numb to macro uncertainty,” BofA remarked.

Since the bank’s derivatives team penned those words last month, stocks are up and rate cut pricing is considerably more aggressive. Of course, the Fed has wittingly pivoted to a more dovish stance, so it makes sense that markets should follow the Committee’s lead. But there are still far more questions than answers around the macro trajectory, which means anyone who claims to have conviction is lying, naive or both.

As BofA went on to point out, this is the first time since its inception, under Alan Greenspan, that the vaunted “Fed put” has been constrained by inflation. “With globalization in reverse, together with increasing geopolitical risks, it may be the last 35 years that were the outlier and not today,” the bank said. “If this is the case, we would expect generally higher inflation, higher economic uncertainty and a less market-friendly Fed.”