Musings on Markets: Data Update 3 for 2023 — Inflation, Interest Rates, and the Cost of Capital

This article analyzes the historic interest rate and bond market volatility of 2022, driven primarily by inflation rather than Fed policy, and examines the consequences for corporate financing costs. The author argues that expected inflation and real growth are the fundamental drivers of rates, not central bank manipulation, and projects that 2023 rate movements will depend largely on inflation trajectories and economic resilience. Rising costs of capital significantly impact corporate investment decisions, debt-equity mix, and cash return policies.